Ilargi: Seven million American households are presently behind on their mortgage payments. Foreclosure filings were reported on 367,056 properties in March (that’s 4.4 million annualized). 1 million repossessions are foreseen in 2010. One in every 138 US homes received foreclosure filings just in the first quarter alone. Of the 230,000 or so "lucky" few who got a mortgage modification done (1.2 million began the program over the past year), 75% already, or still, owe more on the loan than the home is worth. The Obama administration's foreclosure prevention program is "worth" $75 billion. That so far then comes to $326,000 per lucky owner, who has a 3 in 4 chance (s)he's underwater regardless. How does one gauge the success of a plan like that?

The foreclosure flood has been temporarily stalled, that's all there ever was, and now the gates are opening. There were ill-conceived and ill-fated federal programs, states introduced moratoriums and most of all banks delayed foreclosure proceedings either because they liked a full face value loan on their books better than a broken one or because they didn't like the foreclosure costs (which can run into the tens of thousands of dollars), or perhaps because they're simply completely overwhelmed and don’t have the people to process all the paperwork.

But the respite is over. Two weeks ago, the Irvine Housing Blog stated in Bank of America to Increase Foreclosure Rate by 600% in 2010 that Bank of America's OREO department said that the bank would increase its foreclosure activity from 7500 per month to 45,000 per month. That’s 540,000 annualized for just one bank (granted, the biggest one). If this is substantiated, one of two things is true: either 2010 foreclosures will go well over 1 million, or 2011 ones will go so far over it should scare us all breathless. Moreover, there's a solid chance that numbers like these in 8 months time will have debilitating effects on the overall economy, even before New Year's.

Not only are foreclosures, short sales and the like devastating for homeowners, they are a death knell for many banks. For the past three years, Washington's policy has been to sweep anything toxic under the carpet. Well, we’ve run out of carpet. And pondering this unequaled mess, it shouldn’t surprise anyone that jobless claims come in far worse than projected. The very foundations are starting to shake. And it no longer matters what tricks come out of the Fed, the Treasury, Wall Street, the White House or Capitol Hill. There was always just one possible end to the housing crisis: plummeting prices. The glut of newly foreclosed properties added to a hugely oversaturated market will see to it that they do fall, and fast and furious at that.

This will have a cascading effect throughout the economy. Falling home prices will put huge additional numbers of owners underwater. Fannie Mae, Freddie Mac, the FHA, they will all grow beyond salvation, suffering losses (even with funny accounting) that will run in the hundreds of billions of dollars. Property taxes, for many places in America the only thing that stands between mere austerity and full-blown bankruptcy, will have to come down with the home values.

And most and worst of all, the banks which hold large portions of the loans, and which have already received untold trillions of dollars in hand-outs courtesy of the house, will need to come knocking for more, because the process of increasing foreclosures will function to draw toxic paper out of vaults all over the nation, and beyond. Yes, there is a fake recovery in banking, and yes, consumers are fooled enough to go out and buy some more stuff on their credit cards. But there are not nearly enough buyers for all those millions of homes that are now part of the inventory, be it the official or the real one.

How do you get those buyers? Let prices drop 50% from where they are now, that might move some things along. But it would also eradicate the financial system as it is, and, more importantly, as the administration has elected to try and maintain it. There is no smooth solution here, it will get real ugly, and the government's not on your side. If attitudes and policies don't change real quick, it's going to cost you a whole lot of trillions more. Keeping up hugely inflated home prices at all cost has de facto been declared a matter of national security. And to an extent it may well be. But it still must fail. Or not nearly enough people can afford to buy a home. Catch 22. It makes no difference what the next smart way is to keep up appearances even longer: the outcome is as clear as it is inevitable. Real estate built America, and it's going to take it down. Foreclosures will be the wrecking ball for the American economy.

A record number of U.S. homes were lost to foreclosure in the first three months of this year, a sign banks are starting to wade through the backlog of troubled home loans at a faster pace, according to a new report. RealtyTrac Inc. said Thursday that the number of U.S. homes taken over by banks jumped 35 percent in the first quarter from a year ago. In addition, households facing foreclosure grew 16 percent in the same period and 7 percent from the last three months of 2009. More homes were taken over by banks and scheduled for a foreclosure sale than in any quarter going back to at least January 2005, when RealtyTrac began reporting the data, the firm said. "We're right now on pace to see more than 1 million bank repossessions this year," said Rick Sharga, a RealtyTrac senior vice president.

Foreclosures began to ease last year as banks came under pressure from the Obama administration to modify home loans for troubled borrowers. In addition, some states enacted foreclosure moratoriums in hopes of giving homeowners behind in payments time to catch up. And in many cases, banks have had trouble coping with how to handle the glut of problem loans. These factors have helped slow the pace of foreclosures, but now that trend appears to be reversing.

"We're finally seeing the banks start to process the inventory that has been in foreclosure, but delayed in processing," Sharga said. "We expect the pace to accelerate as the year goes on." In all, more than 900,000 households, or one in every 138 homes, received a foreclosure-related notice, RealtyTrac said. The firm based in Irvine, Calif., tracks notices for defaults, scheduled home auctions and home repossessions. Homeowners continue to fall behind on payments because they've lost their job or seen their mortgage payment rise due to an interest-rate reset. Many are unable to refinance because they now owe more on their loan than their home is worth.

The Obama administration's $75 billion foreclosure prevention program has only been able to help a small fraction of troubled homeowners. About 231,000 homeowners have completed loan modifications as part of the Obama administration's flagship foreclosure prevention program through March. That's about 21 percent of the 1.2 million borrowers who began the program over the past year. But another 158,000 homeowners who signed up have dropped out – either because they didn't make payments or failed to return the necessary documents. That's up from about 90,000 just a month earlier.

Last month, the administration expanded the program, launching a plan to reduce the amount some troubled borrowers owe on their home loans and give jobless homeowners a temporary break. But the details of those programs are expected to take months to work out. The states with the highest foreclosure rates in the first quarter were Nevada, Arizona, Florida and California, with Nevada leading the pack, RealtyTrac said. Rising home prices and speculation fueled a wave of home construction there during the housing boom. But now the state, particularly around the Las Vegas metropolitan area, is saddled with a glut of unsold homes.

Still, the number of homes in Nevada that received a foreclosure filing dropped 16 percent from the first quarter last year. All told, one in every 33 homes in Nevada was facing foreclosure, more than four times the national average, RealtyTrac said. Foreclosure filings rose on an annual and quarterly basis in Arizona, however. One in every 49 homes there received a foreclosure-related notice during the quarter. Florida, meanwhile, posted the third-highest foreclosure rate with one out of every 57 properties receiving a foreclosure filing. California accounted for the biggest slice overall of homes facing foreclosure – roughly 23 percent of the nation's total. One in every 62 properties received a foreclosure filing in the first quarter.

RealtyTrac® (realtytrac.com), the leading online marketplace for foreclosure properties, today released its U.S. Foreclosure Market Report™ for Q1 2010, which shows that foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 932,234 properties in the first quarter, a 7 percent increase from the previous quarter and a 16 percent increase from the first quarter of 2009. One in every 138 U.S. housing units received a foreclosure filing during the quarter.

Foreclosure filings were reported on 367,056 properties in March, an increase of nearly 19 percent from the previous month, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005. “Foreclosure activity in the first quarter of 2010 followed a very similar pattern to what we saw in the first quarter of 2009: a shallow trough in January and February followed by a substantial spike in March,” said James J. Saccacio, chief executive officer of RealtyTrac.

“One difference, however, is that the increases were more tilted toward the final stage of foreclosure, with REOs increasing 9 percent on a quarterly basis in the first quarter of 2010 compared to a 13 percent quarterly decrease in REOs in the first quarter of 2009. “This subtle shift in the numbers pushed REOs to the highest quarterly total we’ve ever seen in our report and may be further evidence that lenders are starting to make a dent in the backlog of distressed inventory that has built up over the last year as foreclosure prevention programs and processing delays slowed down the normal foreclosure timeline.”

Foreclosure Activity by TypeDuring the quarter a total of 304,799 properties received default notices (Notices of Default and Lis Pendens), an increase of 1 percent from the previous quarter but down 1 percent from the first quarter of 2009. Default notices were down nearly 11 percent from a peak of more than 342,000 in the third quarter of 2009. Foreclosure auctions were scheduled for the first time on a total of 369,491 properties during the quarter, the highest quarterly total for scheduled auctions in the history of the report. Scheduled auctions increased 12 percent from the previous quarter and were up 21 percent from the first quarter of 2009.

Bank repossessions (REOs) also hit a record high for the report in the first quarter, with a total of 257,944 properties repossessed by the lender during the quarter — an increase of 9 percent from the previous quarter and an increase of 35 percent from the first quarter of 2009.

Nevada, Arizona, Florida post top state foreclosure rates in first quarterAs it has for the past 13 quarters, Nevada continued to document the nation’s highest state foreclosure rate in the first quarter of 2010. One in every 33 Nevada housing units received a foreclosure filing during the quarter, more than four times the national average and an increase of nearly 15 percent from the previous quarter. Still, Nevada’s total of 34,557 properties receiving a foreclosure filing in the first quarter was down 16 percent from the first quarter of 2009.

Arizona foreclosure activity in the first quarter increased on a quarterly and annual basis, helping the state to post the nation’s second highest state foreclosure rate for the third consecutive quarter. One in every 49 Arizona properties received a foreclosure filing during the quarter — nearly three times the national average. With one in every 57 Florida properties receiving a foreclosure filing during the quarter, the state posted the nation’s third highest state foreclosure rate for the second straight quarter. Florida’s Q1 foreclosure activity increased on a quarterly and annual basis.

California foreclosure activity decreased 6 percent from the first quarter of 2009, but the state still documented the nation’s fourth highest foreclosure rate — one in every 62 housing units receiving a foreclosure filing.Utah foreclosure activity increased 75 percent from the first quarter of 2009, the highest annual increase among states with top-10 foreclosure rates and giving it the nation’s fifth highest state foreclosure rate. Foreclosure filings were reported on 10,756 Utah properties, a rate of one in every 88 housing units and an increase of 21 percent from the previous quarter. Other states with foreclosure rates ranking among the top 10 in the first quarter were Michigan, Georgia, Idaho, Illinois and Colorado.

Ten states account for more than 70 percent of nation’s first quarter totalCalifornia alone accounted for 23 percent of the nation’s total foreclosure activity in the first quarter, with 216,263 properties receiving a foreclosure notice — the nation’s highest foreclosure activity total. Florida’s total was second highest, with 153,540 properties receiving a foreclosure filing during the quarter, and Arizona’s total was third highest, with 55,686 properties receiving a foreclosure filing during the quarter. Despite a nearly 5 percent decrease in foreclosure activity from the previous quarter, Illinois documented the fourth highest foreclosure activity total, with 45,780 properties receiving a foreclosure filing — still a 17 percent increase from the first quarter of 2009.

A total of 45,732 Michigan properties received a foreclosure filing during the quarter, the fifth highest state total. Michigan foreclosure activity increased nearly 11 percent from the previous quarter and was up nearly 38 percent from the first quarter of 2009. Other states with foreclosure activity totals among the nation’s 10 highest were Georgia (39,911), Texas (37,354), Nevada (34,557), Ohio (33,221) and Colorado (16,023).

The number of homeowners who defaulted on their mortgages even after securing cheaper terms through the government’s modification program nearly doubled in March, continuing a trend that could undermine the entire program. Data released Wednesday by the Treasury Department and the Housing and Urban Development Department showed that 2,879 modified loans had been ended since the program’s inception in the fall, up from 1,499 in February and 1,005 in January.

The Treasury Department said it could not explain the growing number of what it called cancellations, almost all of which were apparently prompted by the borrower’s being unable to make the new payment. A scant number — 37 — were because the loan had been paid off, presumably because the borrower sold the house. About seven million households are behind on their mortgage payments. The Obama administration’s modification program has been widely criticized for doing little to help them. The program received another bad review on Wednesday with the release of a report from the Congressional Oversight Panel.

The Treasury’s stated goal is for the modification program to help as many as four million households, the oversight report said, “but only some of these offers will result in temporary modifications, and only some of those modifications will convert to final, five-year status.” The report continued: “Even among borrowers who receive five-year modifications, some will eventually fall behind on their payments and once again face foreclosure. In the final reckoning, the goal itself seems small in comparison to the magnitude of the problem.”

The Treasury took issue with the report and said the pace of modifications was picking up. The number of active permanent modifications in March was 227,922, an increase of 35 percent from those in February. An additional 108,212 permanent modifications are awaiting borrower approval. Shaun Donovan, secretary of Housing and Urban Development, said in an interview that those were the important numbers to focus on. “One percent of these loans defaulting is a tiny fraction,” Mr. Donovan said. “Given how stressed these borrowers are, even in the best situation, there will be redefaults. But I don’t think there is any evidence that would cause us to worry at this point.”

Julia R. Gordon, senior policy counsel for the Center for Responsible Lending in Washington, said she expected the number of post-modification defaults to continue to rise. “It’s definitely alarming to look at those statistics,” she said. “The current model for modifications doesn’t necessarily produce sustainable results.” While the program is too new to predict its long-term success, the data on previous modification efforts is not encouraging. Sixty percent of modifications undertaken by banks in late 2008 were in default a year later, according to the latest Mortgage Metrics Report compiled by the Office of Thrift Supervision and the comptroller of the currency.

Many of these private plans either kept the payments the same or increased them. Inevitably, those mortgages suffered the highest failure rate: about two-thirds of the borrowers defaulted again. Loans for which the payments were decreased by at least 20 percent failed at a slower but still significant rate of about 40 percent. The government program takes a more aggressive approach, lowering the interest rates for all loans. On many loans, terms are also extended or principal payments put off for years. Treasury data shows that the median savings for borrowers receiving permanent modifications is $512 a month.

Many borrowers remain deeply indebted, however. They owe not only on the house, but on homeowner association fees, home equity loans, car loans, alimony and credit card interest. Even after modification, $61 out of every $100 earned by the borrower goes to servicing debt, government figures show. For increasing numbers of modification recipients, mortgage relief is apparently not enough to stave off financial collapse. “If you can help 60 percent, and 40 percent have to fall back, is that worthwhile?” asked John Courson, president of the Mortgage Bankers Association. “Clearly for the 60 percent it was, and the 40 percent weren’t going to make it anyway.”

The Treasury said on Wednesday that it had always anticipated that some homeowners would not sustain a modification, which was one reason the program had been greatly expanded. New elements focus on allowing distressed homeowners to sell their properties for less than they owe and on shaving the principal owed by borrowers. The notion of cutting principal, however, has already run into some resistance from the big banks, which do not want borrowers to get the idea that their mortgage can be chopped on a whim.

Just when you think that the statistics can’t get any worse for the graduating class of the Obama Administration’s Home Affordable Modification Program, they do. Otherwise known as HAMP, this program is apparently designed to convince people who really can’t afford their current debt load that they really can.

To that end, it is meeting with modest success.

How else can one explain that total debt-to-income ratios have risen even higher than February’s ridiculous burden of just under 60 percent as noted in this item four weeks ago?

Over the last four weeks, some 60,000 HAMP “trial” participants have had their loan modifications elevated to “permanent” status, meaning that they can now go confidently forth into the world thinking that their impossible debt load is somehow under control.

It’s not.

As shown below, the median back-end debt-to-income ratio has now climbed to over 61 percent with no upper limit in sight (no, you can’t go over 100 percent, but that doesn’t mean they won’t try – just make sure you get that counseling as detailed in note 2).

What is even more astonishing about this data is that things are getting worse very quickly, much faster than the 1.5 percentage point increase in total debt service as shown above.

Consider that, in February, there were 170,000 “permanent” loan mods and, last month, another 60,000 joined their ranks. A quick calculation reveals that, in order for the new graduates to raise the overall median from 59.8 percent to 61.3 percent, the median back-end debt-to-income ratio for the next 60,000 had to be somewhere around 65 percent!!

Sixty five percent!!

How can these people possibly afford to pay their taxes, service their debt, and then have enough money left over to put food on the table and pay their utilities, let alone buy gasoline, clothes, and sock away a little money for retirement?

The government must be living in some kind of loan mod “bizarro world” to think that these “permanent” loans won’t go bad on a massive scale.

That assessment of the government’s grasp on reality was confirmed in this NY Times story the other day when Shaun Donovan, secretary of Housing and Urban Development uttered these rather remarkable words:

Given how stressed these borrowers are, even in the best situation, there will be redefaults. But I don’t think there is any evidence that would cause us to worry at this point.

Of course not…

They’ve got enough to worry about getting people out of old debt burdens that they couldn’t manage into new, slightly lower debt burdens where they have little or no chance of survival either.

Julia Gordon of the Center for Responsible Lending was also quoted in the NY Times story and provided a much more realistic view of things:

It’s definitely alarming to look at those statistics. The current model for modifications doesn’t necessarily produce sustainable results.

Well, maybe that was never the plan.

The record shows that more than half of the loans modified in late-2008 ended up redefaulting within a year and, with debt-to-income levels as high as that being produced by HAMP, you’d expect that success rate to be just a pipe dream for HAMP.

Truly startling is the realization that these 230,000 “permanent” loan modifications represent the current cream of the crop, one that appears to be less creamy every month.

Of course, this is working out rather nicely for the banks.

While the”homeowner” gets a slightly lower mortgage payment, thanks to freakishly low interest rates subsidized by the Treasury Department, the banks get to carry these loans on their books at full value, as if they’ll ultimately be repaid.

And, better yet for other banks, second mortgages are not touched during these loan modifications. In fact, in many cases under their new monthly payment regime, homeowners will be writing out a larger check for their home equity line of credit or second mortgage than for their first mortgage where the payment has been lowered thanks to Uncle Sam.

Clearly Elizabeth Warren had it right yesterday when she told “homeowners”:

Some of you should stay in your homes…and some of you don’t belong in those homes and you’ve got to be moved out. And frankly, those houses need to get back onto the market and get into the hands of people who can afford them. In other words, acknowledge the problem, deal with it, write off the losses and start rebuilding an economy on solid ground.

Now that sounds like a good plan.

The bad news is that, in the government’s eyes, “extend and pretend” appears to be the order of the day – extend the period of time that banks keep getting sent monthly mortgage checks while pretending that all of the borrowed money will somehow be repaid.

The government's foreclosure prevention efforts are struggling to make an impact on millions of borrowers who are in trouble on their mortgages, according to a report issued Wednesday by a congressional watchdog panel. The program, known as Making Home Affordable, is on course to prevent only about 1 million foreclosures, aiding a small fraction of the homeowners who are in trouble with their mortgages nationwide, according to the report by the Congressional Oversight Panel, which monitors spending on financial bailout efforts.

About 230,000 U.S. homeowners had secured permanent loan modification under the program through last month, according to Treasury Department data also released Wednesday. That includes about 14,000 borrowers in the Washington region. But many borrowers who have signed up for the program are in limbo, waiting to prove they qualify for permanent mortgage relief. And more than 150,000 have been dropped from the program because they didn't keep up with their payments or their lender determined they did not qualify after all, according to the Treasury data.

"Treasury's response is lagging behind the pace of the crisis," said Elizabeth Warren, head of the watchdog panel. "It also seems clear that Treasury's programs will not reach the overwhelming majority of homeowners in trouble." Treasury officials said Wednesday that the federal program was never meant to prevent all foreclosures. "It's still going to be a very painful process for millions of Americans, but we're going to keep working to make sure this program reaches as many people as we can reach," said Treasury Secretary Timothy F. Geithner.

Last month, the administration announced that it was revamping the program, adding features to encourage lenders to slash the loan balances of borrowers who owe more than their home is worth, a situation known as being underwater. About 75 percent of the homeowners helped under the federal program were underwater on their mortgage, according the watchdog group's report.

In the Washington region, foreclosures continue to be a problem. On Wednesday, local nonprofit groups and government officials announced the creation of the Capital Area Foreclosure Network to coordinate outreach efforts to distressed borrowers. The network, which includes the Metropolitan Washington Council of Governments and the Nonprofit Roundtable of Greater Washington as well as Fannie Mae and Freddie Mac, will share information among nonprofit groups and banks while coordinating a regional response to the foreclosure crisis.

"People walk into nonprofit housing counseling organizations every day seeking to prevent foreclosure. But these are really complex challenges, and the work is hard," said Chuck Bean, executive director of the Nonprofit Roundtable of Greater Washington. "Now, by bringing together all the players . . . we hope to better support the staff that are on the ground doing the work." Meanwhile, a report by the Urban Institute, a District-based nonprofit policy research group, to be released Thursday found that by the end of last year, nearly 3 percent of outstanding mortgages in the Washington region were in the foreclosure process and 9 percent were delinquent. There are signs that the region's housing market is starting to improve, the report says.

But in the far suburbs and eastern areas, many homes are languishing on the market before selling, according to the report. About 27 percent of homes for sale in the Washington region stay on the market for at least three months. But in Charles County, about 42 percent of homes on the market take at least four months to sell. "The region still faces a substantial challenge from the foreclosure crisis. There are still a lot of homeowners behind on their mortgage," said Peter Tatian, senior research association for the Urban Institute.

Give banks unlimited access to financing at close to 0% and a steep yield curve, exempt them from marking their worst assets to market, and they will earn money, even when their combined commercial loan book is shrinking at an annual rate of 20% –

– and consumer credit is shrinking by 10% a year.

The lending businesses are losing money, but fixed income trading — the use of leverage by bank treasury departments — more than compensates. The first quarter saw an extraordinary tightening in high-yield credit spreads, and an enormous opportunity to book fixed-income profits. What do you do for an encore?

A year ago I was too early in proposing to take profits in banks: when the market expected doomsday, I was sure that the banks would show positive results:

The panic over the banks that prompted Citigroup’s great tumble from $3.50 on Feb. 13 to $0.97 on March 5 erupted out of nothing. Dithering on the part of the Obama administration lent credence to fears that banks were about to be nationalized, as propounded by the irresponsible academic tinkerers and social engineers. It should have been obvious that the banks were making money during the first quarter. Now that FASB 157 with its procyclical mark to market requirement is on the shelf, we can expect modest positives for the banks.

I underestimated the extent to which the new government-bank combination would allow banks to crank out earnings. But none of this has much to do with the rest of the economy. The banking system is financing about three-quarters of the $1.6 trillion Federal deficit, lending to the government at 1% for 2-year notes, with virtually no capital coverage required. Now, that’s an efficient use of bank capital, namely zero to finance Treasury securities on the carry trade.

This is how Japan squeaked through the 1990s. In theory it can go on forever (Japan has been doing it for 20 years). In practice, any number of things can go wrong.

Richard Koo's balance sheet recession theory makes some interesting claims that should be bad news for everyone that's sure inflation is right around the corner, and betting on it.

It is Koo's belief that inflation does not have to rise along with deficits and the printing of more money.

When the private sector is choosing to pay down its debt and make savings, the government has to step in to fill the gap.

If it is the only borrower, it needs to keep spending or the system will stop moving, and the country will face economic contraction. This is what happened in Japan, when the government attempted to cut its deficit in 1997 and 2001.

But that increase in government spending would, under normal economic rules, lead to inflation as there is an increase in the money supply. Instead, banks use the additional money in the system to pay down their debts, not providing it for private spending through loans.

Private companies also follow a similar path, paying down debts rather than spending.

With little money actually being spent, on things like higher wages or goods and services, the value of money maintains while the system pays down its debts.

The number of people applying for unemployment benefits jumped 24,000 in the latest week, U.S. data showed Thursday, but the increase in first-time filings appeared to stem largely from the Easter holiday and other factors that distorted the data. Initial claims shot up to a seasonally adjusted 484,000 in the week ended April 10, the Labor Department said.

The four-week average of initial claims -- a better gauge of employment trends than the volatile weekly number -- also rose, gaining by 7,500 to 457,750. Claims have unexpectedly risen two straight weeks, but a Labor official said the Easter holiday and a special holiday in California, the nation's largest state, disrupted collection of jobless data. The distortions should fade over the next few weeks, he said.

Economists surveyed by MarketWatch had forecast that claims would drop to 430,000. Claims have to fall to 400,000 or lower to indicate an accelerated hiring trend, economists say. While the government last week reported the highest monthly job growth in three years, the unemployment rate remains stuck at a stubbornly high 9.7%. And many of the new jobs created in March reflected temporary hiring for the U.S. Census.

Although the U.S. economy's expected recover throughout 2010, it will take strong and sustained growth to make inroads in unemployment: More than 8 million people lost their jobs during the recession. Initial claims are down 20% from the same week in April 2009, but they are 6% higher compared to the end of last year. In the week ended April 3, meanwhile, the number of people who continue to receive regular state unemployment checks climbed 73,000 to total a seasonally adjusted 4.64 million. Yet the four-week moving average dropped 13,750 to 4.64 million, the lowest rate since January 2009.

Because of the severity of the recent recession, the government has offered extended benefits for up to 99 weeks to workers in the hardest hit states. Regular unemployment benefits run out after 26 weeks. In the week ended March 27, the number of workers receiving extended federal benefits rose by 159,844 to 5.97 million, not seasonally adjusted. All told, 11.08 million people were collecting some type of unemployment benefits in the week of March 27, up from 11.07 million. The numbers are not seasonally adjusted.

A record 44% of the nation's unemployed have been out of work at least six months. Many of those 6.5 million people may never completely rebuild their working lives.

Despite optimism over recent job gains, one grim statistic casts a long shadow over the recovering economy -- a record 44% of the nation's 15 million unemployed have been out of work for more than six months. And the evidence suggests that many of them may never completely rebuild the working lives they lost. Never since the Great Depression has the U.S. labor market seen anything like it. The previous high in long-term unemployment was 26% in June 1983, just after the deep downturn of the early 1980s. The 44% rate in March translates into more than 6.5 million people.

In fact, nearly two-thirds of these workers have been jobless for a year or longer, new Labor Department reports show. On Wednesday, Federal Reserve Chairman Ben S. Bernanke told the congressional Joint Economic Committee that he was "particularly concerned" about the huge number of long-term unemployed. "Long periods without work erode individuals' skills and hurt future employment prospects," he said. "Younger workers may be particularly adversely affected if a weak labor market prevents them from finding a first job or from gaining important work experience."

Bernanke also reiterated his recent comments that the economy is in the midst of a "moderate" recovery from the recession and that the country needs to address soaring budget deficits. The Fed also expects that its near-zero interest rate policy will continue for an extended period. The efforts to resuscitate the economy as well as the hardships of unemployed workers are straining the nation's finances too. In normal times, jobless workers can qualify for up to 26 weeks of state unemployment benefits. But the severe economic crisis in the last two years has prompted Washington to help fund jobless benefits for up to 99 weeks in high-unemployment states, including California and Florida.

Federal spending on unemployment benefits could reach $168 billion this year, five times the level in the years just before the recession, according to a report by Pew Charitable Trusts. In addition, tens of billions of dollars more are being spent on food assistance for unemployed workers and their families. At the same time, government revenues have fallen as Social Security, payroll and other tax receipts have shriveled with fewer jobs and lower earnings. That has contributed to massive fiscal problems in many states.

California, which is expected to report the latest jobless figures for the state Friday, already owes the federal government about $7 billion for unemployment benefit loans and is getting deeper in the hole by the week. "It's really killing efforts to rein in the deficit," said David Card, an economics professor at UC Berkeley, which has made cuts in faculty pay and course selections. The rise in long-term unemployment -- coupled with economists' projections of a slow recovery in the job market -- means the toll to individual and government budgets is likely to persist for some time. Labor Department figures suggest there are 5.5 unemployed workers today for each job opening, compared with two job seekers for every opening in 2007.

And the seriousness of the problem is magnified by the enormous scale of job loss during the recession, in which more than 8 million jobs were cut -- on top of the roughly 7 million people who were jobless before it began in 2007. The economy needs to create about 125,000 jobs a month just to keep pace with the population growth, and the recovery isn't expected this year to produce anywhere near the several hundred thousand jobs that are needed monthly to make a significant dent in the unemployment rate, currently at 9.7%.

As for the kinds of long-term jobs being created, government data show a smattering of gains all across the spectrum -- from minimum-wage to high-income. But there is no sign yet of a surge in the kinds of stable, above-average-income jobs that have been the backbone of the nation's prosperity in the past. Healthcare and temporary jobs have been leading the pack, but many of the jobs come with relatively modest wages.

The problem has another, less direct effect as well: Because many of the long-term unemployed are older workers, some have little choice but to retire earlier than planned. That means more people will be drawing Social Security and Medicare, and fewer will be contributing to those programs through payroll taxes. As in previous downturns, a large share of the long-term unemployed are in manufacturing and construction.

But most of today's workers who have been jobless for 27 weeks or more are in sales, office and other service industry jobs, including more than 1 million in management and professional occupations. Some economists doubt that workers in general would lose skills after just six months or even a year or two out of work. But there is widespread agreement that, for whatever reasons, long periods of unemployment tend to make it tougher to get reemployed. And even after getting hired, such workers will probably experience a sharp and lasting hit to their incomes.

In one prominent study, Columbia University economist Till von Wachter examined the pay history of workers who lost their jobs during the early 1980s recession. Using Social Security earnings records, Von Wachter and co-researchers found that these previously stable workers who lost their jobs but found new ones later were earning 20% less a decade later than other workers who weren't let go during that period. For the laid-off group, the income losses didn't fade away completely even 20 years later.

Jim Sullivan, a Philadelphia-area resident, had his best earnings ever in 2008. He made $140,000 as director of operations for a small landscape supply firm. But sales plunged last year, and in June he was one of a dozen employees laid off. "I've sent out probably in excess of 3,000 resumes and had a grand total of two telephone interviews," said the 52-year-old, whose longest bout of unemployment before was three weeks in the early 1980s soon after college.

Lately Sullivan has seen more postings on job boards and feels a little more optimistic about the future. But he's not counting on pulling down a six-figure income any time soon. "I'd be tickled to death to take 40% of that right now," he said. That works out to $56,000. Sullivan, a single father of a 13-year-old girl, has been drawing unemployment benefits of $558 a week, before taxes. But that hasn't been enough to cover his mortgage and other bills. He has gone through most of his savings and is contemplating selling his house, which he has owned for 15 years. He doesn't want to move far and uproot his daughter.

For some workers, upside-down mortgages and an inability to sell their homes have restricted mobility, prolonging their joblessness. For others like Sullivan, age adds another barrier to a group that already may face a stigma, having been out of work for a long stretch. This so-called scarring effect may not be so bad today given the huge numbers of long-term unemployed. Still, it's especially hard for older workers, and 4 out of 10 of those out of work for more than six months are 45 or older.

Rola Cook of Molalla, Ore., south of Portland, had planned to work until he hit 66. But the recession changed everything. Two years ago, he was laid off from his sales job at a paint company, and he has been drawing unemployment benefits ever since. Next month Cook will turn 62. Unless something pops up, he plans to start collecting Social Security. With two years of college, Cook has bounced from one job to another in the last decade. But his wife still works at a local lumber company. And the couple has a solid financial cushion from years of smart property investments and plain vanilla savings -- individual retirement accounts and certificates of deposit. "My wife and I have always been quite frugal," he said, noting that their grocery bills amount to just $30 a week.

At the other end of the career curve are young workers, including recent college graduates, many of whom have been kept on the sidelines, missing out on valuable job experience that's needed to build their careers. As each day of unemployment goes by, some of the long-term jobless worry that employers will look at them as damaged goods, wondering what's wrong with them that they have been unemployed for so long. Cook actually worries more about them than about himself. "I'm not feeling good about not working," he said. "What I'm concerned about is all these kids going to college. I don't know where they're going to go to work."

When Professor Antal E. Fekete began lecturing on Austrian economics in Hungary in the spring of 2007, the global economy had not yet experienced the collapse which Austrian economist Ludwig von Mises had predicted over a half century before, to wit,

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

A quarter century of uninterrupted and unprecedented credit expansion begun by the US in the 1980s, however, came to an abrupt halt months later in August 2007 when global credit markets froze, precipitating an economic crisis the severity of which surprised all except those who expected it.

Among those who foresaw the crisis was Peter Warburton. In 1999, Warburton warned in his extraordinary book, Debt & Delusion, that changes in our financial system masked deep maladjustments that would someday make themselves known, that rapidly rising valuations would readjust, perhaps violently, and that we were particularly blind in recognizing the dangers which confronted us.

Warburton was not an Austrian economist who believed in the inevitable collapse of excessive credit driven markets. Warburton instead believed that debt-based money and credit aggregates controlled by central bankers were critical components of modern functioning economies.

In an article in 2001, Warburton wrote:

We called ourselves international monetarists then and we had a model that determined the inflation rate from the growth of money stock per unit of output, with long and variable lags… We felt sure that if the authorities could regulate the growth of the money supply, all would be well.

He then added,

How wrong we were.

WARBURTON’S CONTRIBUTION

Warburton’s contribution to the current economic dialogue derives from his belief in that which he now critiques. Warburton’s blinding insights are those of one who was himself previously blind.

Warburton’s Debt & Delusion, published in 1999, is a seminal work explaining what went wrong and where. His explanation of the changed role of banks and government in the issuance of credit is uniquely insightful; and, whereas Austrian economics offers a wide-angle view of the present crisis, Warburton’s Debt & Delusion gives what only a jeweler’s loupe can provide, a close-up focus that explains and exposes the blind spots of those who still purport to see.

the leading economies..have fallen victim to a dangerous illusion, related to the anarchic development of global capital and credit markets. … the thesis is very straightforward: that both citizens and governments have become heavily addicted to borrowing and no longer care about the consequences.

Seen through Warburton’s eyes, the delusions of modern economists are many, such as central banking’s believed containment of inflation, what economists such as Paul Samuelson and Ben Bernanke call “the great moderation”, which is, in fact, but a communal delusion; a collective and fatal error the consequences of which have yet to be fully experienced.

PUBLISHING THE TRUTH A THREAT TO THEIR KINGDOM

Published in 1999, the first printing of Debt & Delusion sold out, befitting a work of elegantly written prose and unique insights. In the book industry, it is expected that a sold out first printing is followed by a second and a third and so on until public demand is satisfied.

For those knowledgeable about book selling, the currently failing model is based on costly first time marketing and distribution efforts by publishers who hope their initial costs will be recouped. If so, publishers can then sell additional printings to a waiting audience. But although Debt & Delusion sold out, it was never reprinted by its original publisher.

Instead, Debt & Delusion was to share the fate of another book of significant monetary importance, The of Future of Money by Bernard Lietaer. Bernard Lietaer’s reputation in the world of money and economics is well-deserved. Retained by both nations and multi-national corporations to consult on issues of monetary importance, Lietaer was, in addition, once named the world’s top currency trader by Business Week.

As such, Lietaer is a respected financial figure and his criticism of today’s monetary system is not to be taken lightly. Lietaer’s criticisms, however, are far more fundamental than those of either Warburton or Austrian economists—Lietaer in The Future of Money directly targets the system of money itself and specifically the US dollar, warning among other things that:

..Unless precautions are taken, there is at least a 50-50 chance that the next five to ten years will see a dollar crisis that would amount to a global meltdown.

The Future of Money, Bernard Lietaer, Century/Random House 2001

Although written in English and published by Random House, the world's largest English language trade publisher, Lietaer’s book was never sold in the US: and, like Warburton’s book, monetarily significant with a sold-out first printing, a second printing was never forthcoming.

Perhaps coincidentally—or perhaps not—a book with the same title, The Future of Money, written by another author, Benjamin J. Cohen, was later published by Princeton University Press with instead a strongly positive message about the US dollar.

In the East, Mao Tse-Tung had concluded that power comes out of the barrel of a gun. But, in the West, for 250 years power has come from the bankers’ issuance of debt-based paper money and the franchise for that power is not going to be easily relinquished—or its shortcomings and vulnerabilities readily allowed to be revealed.

THE ARMAGEDDON SIGNAL

At the Gold Standard Institute session in Hungary in March, Sandeep Jaitly explained the origins and intricacies of the calculating the basis and co-basis, the two elements he uses in anticipating movements in the price of gold.

It was Peter Warburton who had first directed Sandeep Jaitly to the writings of Professor Fekete and it was Professor Fekete who encouraged Mr. Jaitly to study the basis. Both the professor and Mr. Jaitly share a deep respect for the theories of Carl Menger, the Austrian economist; and, at the conference, Professor Fekete announced a curriculum where the ideas of Austrian economists such as Menger will be taught.

Mr. Jaitly believes there is no better signal than the basis for anticipating the eventual flight out of paper assets into gold—an event he believes will be predicted by the basis, i.e. the Armageddon signal, a sign that the tipping point has been reached.

MONEY, POWER, ELITES & THE EURO

The euro is an attempt by European elites to imitate the 250 year-old Anglo-American franchise of global power derived from the ability to issue debt-based money from a central bank and parlay this into increased economic and political power. The intent was to return Europe to a position of power more equal to that of the US.

By the end of the 20th century, it was clear that the US dollar was increasingly vulnerable. Since 1971, the US dollar could no longer be converted to gold, giving Europe the opportunity to issue its own currency, the euro. But from its inception, the euro contained flaws which were ignored by the European elites in their determination to achieve their political ends.

…The determination of a political elite to bring the single European currency into being has swept aside all forms of opposition…However, the gravity of the commitment that these politicians have made on behalf of their electorates will take time to become fully apparent.

…They have been led to believe that their economic lives will become more straightforward and that a single currency will enhance the economic standing of Europe on the world stage…On the contrary, the political independence of the constituent countries is at stake in this bold venture…The ability and the desire of the EMU countries to abide by new fiscal rules must be seen in the light of past budgetary lapses and heavy net interest burdens. [bold, mine]

pp. 230, 233

The elites of the EMU countries, however, did want to hear about possible problems. Elites have agendas and arguments opposing those agendas are rarely given serious consideration.

While the European elites were correct that the Anglo-American empire was vulnerable; they were wrong in believing the euro would provide a meaningful alternative as the euro, like the dollar, would not be backed by gold.

It is now clear that US opposition to a gold-backed euro would have prevented its implementation. In The Future of Money, Lietaer refers to US opposition to any new global reserve currency. This is because the US dollar is the foundation of US power just as the British pound was the basis of the British empire.

The foundation of the Anglo-American franchise of global power was debt-based paper money backed by gold. But, in the 1930s, England could no longer maintain its gold backing; and the US was unable to do so after 1971, a process I describe in The Traveler’s Tale (2005), a story of how America lost its wealth in its pursuit of empire, a pursuit that would cost it far more than it would ever gain.

THE WEST’S WAR ON GOLD

After 1971 when gold was no longer anchored the currencies of the West, Western central banks embarked on a campaign to defend their now fiat paper currencies against any rise in the price of gold, oil and other commodities that would expose the declining value of their paper currencies.

Thus began the West’s war on gold, a war directed by the West’s central banks. In an article written in 2001, Peter Warburton expertly deconstructs and details what to most is still opaque, the reason why the gold market is manipulated by Western ruling elites.

Warburton’s article exposes why the US Commodity Futures Trading Commission last month chose to ignore charges that gold and silver markets are manipulated. The central banks (and the CFTC) are well aware of the manipulation; the reason being that central banks are responsible for the manipulation and Warburton explains why:

What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, their actions seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets.

It is important to recognize that the central banks have found the battle on the second front much easier to fight than the first. Last November, I estimated the size of the gross stock of global debt instruments at $90 trillion for mid-2000. How much capital would it take to control the combined gold, oil and commodity markets? Probably, no more than $200bn, using derivatives. Moreover, it is not necessary for the central banks to fight the battle themselves, although central bank gold sales and gold leasing have certainly contributed to the cause. Most of the world’s large investment banks have over-traded their capital so flagrantly that if the central banks were to lose the fight on the first front, then their stock would be worthless. Because their fate is intertwined with that of the central banks, investment banks are willing participants in the battle against rising gold, oil and commodity prices.

Central banks, and particularly the US Federal Reserve, are deploying their heavy artillery in the battle against a systemic collapse. This has been their primary concern for at least seven years. Their immediate objectives are to prevent the private sector bond market from closing its doors to new or refinancing borrowers and to forestall a technical break in the Dow Jones Industrials. Keeping the bond markets open is absolutely vital at a time when corporate profitability is on the ropes. Keeping the equity index on an even keel is essential to protect the wealth of the household sector and to maintain the expectation of future gains. For as long as these objectives can be achieved, the value of the US dollar can also be stabilized in relation to other currencies, despite the extraordinary imbalances in external trade.

WHY GOVERNMENTS HELP BANKS INSTEAD OF PEOPLE

When the global economy collapsed in 2008, governments rescued the banks, the very ones responsible for the collapse. This is because without the banks’ debt-based paper money, governments could not spend the vast amounts they do not really have.

Politicians seek power and bankers seek profit and their collusion is responsible for the present crisis. Do not be surprised at the current state of affairs, the motives of the participants are clear and so are the consequences.

These are exceptional times and while we are helpless to prevent what is about to happen, so, too, are bankers and politicians. They have brought this state of affairs upon themselves and for this we should be grateful—for without their demise we would be enslaved forever.

The derivatives reform bill being written by Senate Agriculture Chairman Blanche Lincoln would require banks to spin off their swaps desks, a Senate staff worker said on Wednesday. The provision could cut into bank revenues. Lincoln was on track to unveil her bill on Thursday. Details of the proposal on swaps desks were not available. Research and advisory firm TABB Group estimates the top 20 dealers generate around $40 billion annually from over-the-counter derivatives, excluding credit default swaps. A handful of banks are leading dealers in swaps.

Lincoln says her bill would require reporting of all trades in the $450 trillion swaps market and require high-volume standardized transactions to be traded on regulated platforms and to go through clearinghouses. "Systemically important institutions" would be required to submit high-volume standardized contracts to central clearing. In addition, Lincoln would allow only "a narrow exemption" from clearing for nonfinancial "end users," who range from utilities and airlines to manufacturers, who use swaps to guarantee a supply of materials and lock in their price.

Greece on Thursday appeared to be taking another step toward the first sovereign bailout in the history of the euro zone, amid growing doubts that the country could continue raising money on financial markets. In a letter to European and International Monetary Fund officials, Finance Minister George Papaconstantinou asked that formal "discussions" on an aid package begin, in the event Greece would need to avail itself of that aid.

"Greek authorities are requesting discussions with the European Commission, the (European Central Bank) and the IMF on a multiyear program of economic policies... that could be supported with financial assistance from the euro-area member states and the IMF, if the Greek authorities were to decide to request such assistance," the letter said. Seeing the letter as the first step towards a formal request for help, Greek financial markets staged a relief rally late Thursday with the Athens Stock Exchange up 2% at 2027.54 points. At the same time, the interest rate spread on Greek government bonds over their benchmark German counterpart—a measure of credit risk—narrowed to around 3.98 percentage points, down from about 4.10 percentage points earlier in the day.

Following on the request, the IMF announced that it would be sending a delegation to Athens to discuss financing arrangements. The news comes as the Greek government cuts its expectations on the amount it hopes to raise from a global dollar bond at the end of this month, which it may even be scrapped altogether if interest from U.S. investors keeps waning, two government officials said. One of the officials said Athens now hopes to raise "between $1 billion and $4 billion," compared with $5 billion to $10 billion previously. "Fact is there is no strong interest in the U.S. for Greek debt," a second official said, adding that Athens could cancel the issuance if "the minimum necessary amount can't be collected."

Greece has been pinning its hopes on the U.S.-dollar bond deal to gather much of the funding it needs to cover some €8.8 billion in bond redemptions that come due in May, including an €8.5 billion, 10-year bond that is due May 19. Athens has said that it has enough cash on hand to meet its needs until the beginning of May. If the deal fails it could send a negative signal to the markets and further increase Greece's already high cost of borrowing. This could in turn further push Greece towards the EU-IMF bailout package that it has asked for but wants to avoid because of the political backlash at home.

Last Sunday, finance ministers from the 16 countries that use the euro agreed on a joint rescue plan for Greece that would include as much as €30 billion from other euro-zone members in the first year, and a mooted €15 billion from the IMF. However, some details of the plan—including how long it would take to activate the loan—still remain unclear and have since stoked renewed investor jitters in the market. Even so, a government official said that Greece would still proceed with a previously announced "nondeal" roadshow next week to meet with American investors and gauge their interest in Greek debt. "Nothing has changed with respect to the roadshow," the official said.

But U.S. investors appear skeptical that Greece will live up to its promises of fiscal restraint, even with the EU-IMF package ready, if the country can't get the financing it needs from capital markets. "I don't see that there is real demand for a Greek dollar-denominated bond at the moment," said Mark Grant, managing director at Southwest Securities. "That is because credibility in Greece is low and the purported EU-IMF package is only a plan and not a real deal because there is just too much uncertainty about whether it can be activated and how quickly it can brought into effect."

Signficantly, Pimco, the world's largest fixed income manager has already voiced its reservations about the U.S. deal. "It was a bold announcement and there was greater specificity" compared with past promises of help, said Mohamed El-Erian, co-chief executive of Pimco said this week, referring to the amount of the bailout package announced last weekend. "But if all that we know is what we know today, Pimco would be on the sidelines." Pimco's announcement from Pimco has weighed on Greek government thinking. "If Pimco is out, then there is little hope to raise the originally planned amount," the second person said. "Many other big investors will follow their lead and stay out."

He said a final decision on whether the dollar bond will be issued will be taken after the roadshow that will include stops in New York, Boston and California. "We hope to be pleasantly surprised as conditions in the (Greek) debt market often change by the hour," the first official said. The limited interest by U.S. investors was the second piece of bad news that Athens recently got on the dollar bond. A planned roadshow in Asia was cancelled last week after Chinese investors showed no interest for Greek debt. The officials declined to say what Greece would do if the dollar bond failed, although in recent weeks debt agency officials have hinted that the country could resort to short-term borrowing or other financing arrangements to cover their immediate needs.

As we celebrate year three of the Great Financial Crisis with the first official bailout of an entire country (Greece), I’m still astounded and the complete and utter lack of coverage the underlying cause of this Crisis has received.

We’ve had tens of thousands, if not hundreds of thousands of articles and research reports have been written about the Crisis, and yet I would wager less than 1% of them actually bother talking about what caused it, let alone how the various efforts to stop it have in fact FAILED to address the key issues.

Remember back in 2007? At that time we were told it was all about Subprime mortgages. Then in 2008, we were told it was the investment banks, specifically Lehman Brothers’ failure and AIG’s credit default swaps. In 2009, we were told it was poor accounting standards and bad bets made by Wall Street. And here we are in 2010, and we’re still being told it was simply bad bets made by Wall Street.

All of these answers are partially right, but none of them are totally 100% accurate. Why? Because they fail to address the one underlying issue that links ALL of these items. I’m talking about the Black Hole of Finance: a bottomless pit that no official or regulator bothers mentioning in public because acknowledging it would mean acknowledging that all of the efforts to stop the Crisis are truly paltry.

What caused the Crisis?

Derivatives.

You’ve probably heard this term before, or have some vague understanding of what it means. But the actual reality of derivatives and what they mean for the financial markets remains a topic no one in the mainstream media (or the regulators for that matter) wants to touch.

Why?

Let’s do some quick math.

If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you’d get a market capitalization of roughly $72 trillion.

The notional value of the derivative market is roughly $1+ QUADRILLION.

I realize that number sounds like something out of Looney tunes, so I’ll try to put it into perspective.

$1+ Quadrillion is roughly:

40 TIMES THE WORLD’S STOCK MARKET.

10 TIMES the value of EVERY STOCK AND EVERY BOND ON THE PLANET.

23 TIMES WORLD GDP.

What’s a derivative?

As their name implies, derivatives are “derived” from underlying assets (homes, debt, etc). A lot of smart people have tried to explain what these things are, but miss the forest for the trees. A derivative is NOT an asset. It’s, in reality, nothing, just an imaginary security of no value that banks trade as a kind of “gentleman’s bet” on the value of future risk or securities.

Let’s say you and I want to bet on whether our neighbor Joe will default on his mortgage. Is the bet an asset? Does it have any real value? Both counts register a definite “no.”

That’s the equivalent of a derivative.

It is total and complete lunacy to claim these items are anything more than fiction (perpetuated by another fiction: that Wall Street is able to value these things or price them accurately). But thanks to Wall Street’s lobbying power, they’ve become the centerpiece of the financial markets.

If these numbers scare you, you’re not alone. As early as 1998, soon to be chairperson of the Commodity Futures Trading Commission (CFTC), Brooksley Born, approached Alan Greenspan, Bob Rubin, and Larry Summers (the three heads of economic policy) about derivatives. She said she thought derivatives should be reined in and regulated because they were getting too out of control. The response from Greenspan and company was that if she pushed for regulation that the market would implode.

Remember, this was back in 1998: a full DECADE before the Crisis occurred. And already, the guys in charge of the markets knew that derivatives were such a big problem that trying to regulate them or increase transparency would destroy the market.

So why are these items so accepted? Well, for one thing Wall Street makes roughly $35 billion+ per year from trading them, so it has a powerful incentive to keep them untouched.

Also, it’s kind of difficult for Ben Bernanke and the world’s central bankers to claim they saved the financial world from destruction when you realize that even the most liberal estimate of the bailout costs ($24 trillion) is equal to less than 2% of the derivatives market.

Indeed, even saying the number ($1+ QUADRILLION) sounds ridiculous. Every time I’ve mentioned it at a dinner party I get nothing but blank stares or snickers. Can you imagine if someone in a position of power actually bothered explaining this on TV? The entire financial media would respond with, “well, that’s great, now we…. wait a minute… what did you just say?”

The most common derivatives are based on common financial entities/ issues: commodities, stocks, bonds, interest rates, etc. However, the vast bulk of them (84%) are based on interest rates. If you’ve been confused as to why Bernanke claims the US is in recovery but promises to keep interest rates at 0% for a long time, there’s your answer.

After all, in 2008 the Credit Default Swap (CDS) market (which incidentally is only

1/10th the size of the interest rate-based derivative market) nearly destroyed the entire financial system. One can only imagine what would happen if the interest rate-based derivative market (which is ten times as large) suffered a similar Crisis.

At some point, and I cannot tell you when, the ticking time bomb that is the derivatives market will implode again. We’ve already had a warning shot with China telling its state owned enterprises to simply default on their existing commodity based derivative contracts with US investment banks.

We are also discovering that Greece and Italy (and likely other) countries have used derivatives to hide their true debt levels. This realization has sparked an investigation into derivatives in Europe, which could of course spark off a chain reaction if things get too ugly.

Suffice to say, the “derivative issue” is nowhere near over. It’s only a matter of time before we have another glitch in the system which will kick off Round Two of the Financial Crisis. In the meantime, there are a few steps you can take to protect your savings.

When it comes to opposing the Democratic Wall Street reform plan, Republican leadership has a logic problem: If the Democratic idea to wind down and liquidate banks that are currently deemed "too big to fail" is no good, then what's the alternative? The obvious answer, of course, is to break the banks down in size so that failure doesn't jeopardize the entire system. That might sound like an unusual position for the GOP to adopt but, slowly, Republican senators are beginning to embrace it.

Last week, Sen. John Cornyn (R-Texas) and Minority Leader Mitch McConnell (R-Ky.) met with 25 top Wall Street executives in New York City to hear their concerns regarding reform. Both say they oppose the Democratic plan as a perpetual bailout. "By creating a fund, that's an invitation to Congress to spend that money just as we have in the highway trust fund and the surplus in Social Security," Cornyn said. HuffPost asked Cornyn what his alternative solution to the Democratic plan would be. "I think we need to look at the concentration of banking in just a handful of entities that threaten our economy if they go under," Cornyn said. "They need to be smaller in order to avoid that problem and I would support efforts to move in that direction."

At a press conference Wednesday afternoon, McConnell described it as "a permanent taxpayer bailout of Wall Street banks," "an endless taxpayer bailout of Wall Street banks" and "a perpetual taxpayer bailout of Wall Street banks." Making those banks smaller, said Cornyn, would reduce the risk. "Sixty percent of all the banking assets are concentrated in ten banks in the country," said Cornyn. HuffPost asked if he'd support what's known as the Volcker Rule, an administration plan to split off risky trading done by banks for their own gain from standard commercial banking activities. "Yes," he said, "I think that's one approach." Without prompting, he added: "Glass-Steagall, we need to look at that."

The repeal of Glass-Steagall in the late 1990s, which allowed banks to greatly expand in size and scope of operations, is often cited as a cause of the crisis, as banks used insured deposits for risky investments that went bad. "We all -- I say we all, but almost all of us -- made the mistake of repealing Glass-Steagall in 1999," Sen. Johnny Isakson (R-Ga.) told HuffPost. "Some of the problems of the big banks were brought about by the blurring of the restrictions on where they could go. And they went into brokerage and they went into derivatives they went into lots of other things. Maybe we need to look back to that, but it's hard to put the genie back in the bottle."

The suggestion to break up banks has been called "very radical," but it's embraced by mainstream economists, including three presidents of Federal Reserve regional banks. On Thursday, James Bullard, president and chief executive of the Federal Reserve Bank of St. Louis, joined Kansas City Fed President Thomas Hoenig and Dallas Fed President Richard Fisher in pressing for a break-up of big banks. The GOP, in pushing for tougher bank regulation, should be careful what they wish for, Sen. Charles Schumer (D-N.Y.) said on Thursday. "He wants to toughen up the provisions so the taxpayer isn't on the hook? Good. We welcome it," said Schumer of McConnell's objections.

Sen. Richard Shelby, the highest-ranking Republican on the Banking Committee, was asked to explain this week just how it is that the Democratic plan amounts to a perpetual bailout. He said that regardless of how the bill is written, if there is a perception that a big bank will be bailed out, then the "too big to fail" problem continues. "Well, I could sit down with you if we had a couple of hours and had the sheets spread out you know, a lot of pages, but I think any perception -- not just reality, but the perception -- that you're creating a fund here to be used, could be used or misused for bailouts is a mistake," said Shelby of Alabama.

How do you eliminate that possibility as long as big banks exist, Shelby was asked. "I think as Dr. Volcker has said, if they're too big to regulate properly, maybe they're too big to exist. I know there's a lot of talk on both sides of the Atlantic to deal with that. I never thought that being too big by itself was bad but I believe that being too big and believing that you're going to be bailed out is horrible. And you've got to remember, the government never bails out the small and medium-sized banks or companies, it's always the huge" banks, Shelby said. Sensing news in the water, reporters continued to circle: Should they be broken up? "That is an argument and I think they're talking about it. Merv King has talked about it on the other side of the Atlantic," he said.

Is it an argument Shelby agrees with? Shelby smiled broadly. "You're looking at somebody [who was] the only Republican who voted against the repeal of Glass-Steagall," he said. Don Stewart, a spokesman for McConnell, said that McConnell objects specifically to the creation of a $50 billion fund that would be used to wind down big banks. "Rather than letting banks know that they'll be bailed out no matter what, they need to be disincentivized from getting themselves in that position in the first place -- part of that is taking away the potential of a bailout," he said. Stewart cited testimony from Treasury Secretary Tim Geithner a few months ago:

The third element of effective reform is making sure that taxpayers are not on the hook for any losses that might result from the failure and subsequent resolution of a large financial firm. The government should have the authority to recoup any such losses by assessing a fee on large financial firms. These assessments should be stretched out over time, as necessary, to avoid adding to the pressure induced by the crisis.

Such an ex-post funding mechanism has several advantages over an ex-ante fund. Most notably, it would generate less moral hazard because a standing fund would create expectations that the government would step in to protect shareholders and creditors from losses. In essence, a standing fund would be viewed as a form of insurance for those stakeholders.

Sen. Bob Corker (R-Ala), who, with Sen. Mark Warner (D-Va.), negotiated the provision that McConnell calls a permanent bailout, told HuffPost Thursday that he would be okay with eliminating the $50 billion pre-fund. "Whether it's a pre-fund or post-fund is not central to the resolution," he said. "What I've said is, 'Let's do away with it. Let's just post-fund everything if that's a problem, if that's what everybody thinks is problematic."House Republicans, meanwhile, say their alternative to breaking up the banks is to make big institutions go through the bankruptcy code.

"Republicans are proposing a new chapter to the bankruptcy code to make it more efficient and better suited for resolving large non-bank financial institutions," said a spokeswoman for House Minority Leader John Boehner (R-Ohio.). "The proposed chapter will facilitate coordination between the regulators of these institutions and the bankruptcy system to allow regulators to provide technical assistance and specialized expertise about financial institutions. Bankruptcy judges would also have the power to stay claims by creditors and counterparties to prevent runs on troubled institutions."

While that may not be remarkably different than what Corker and Warner agreed to, it might not end the possibility of bailouts either. "In ordinary bankruptcy you can get debtor-in-possession money if companies have assets, and through a bankruptcy court or through a resolution court, they can do that," Shelby noted. Senate Republicans will find a receptive audience in Sen. Blanche Lincoln (D-Ark.) for their proposal to break up banks.

"Our hopes are that banks will be able to separate the risky aspects of what they do from the vulnerability [of the system]," Lincoln said Thursday, adding that she may have legislative language ready by Friday morning. Lincoln, chair of the Agriculture Committee, has jurisdiction over derivatives regulation. "I'm going to certainly make sure that people understand that when there's risky businessm, there's going to be regulation."

The White House is pushing hard. Chief of Staff Rahm Emanuel, leaving the Capitol on Thursday, told HuffPost he is happy to have Republican support for a tougher bill. "There's a bipartisan bill to be had here. And the fact is it's all about whether we're going to be comprehensive, even with the derivatives section," he said. "Warren Buffet spoke about it: 'This is where, in fact, future crises can occur.' And whether we're going to have a tough, comprehensive, transparent... section on derivatives, is where, in fact, the whole issue is at."

A third top Fed official is calling for megabanks to be broken up. James Bullard, president and chief executive of the Federal Reserve Bank of St. Louis, echoed the call of Kansas City Fed President Thomas M. Hoenig and Dallas Fed President Richard W. Fisher, telling reporters that the nation's biggest banks should be busted up into pieces. The only impediment to doing so, he said, is how. "If you had a clear road map, I'd be for it," Bullard said Thursday at the Hyman P. Minsky Conference in New York. "If there was a good way to do so, if you had a clear road map about how you were going to go about it, and why you were going to break them up in this particular way."

Bullard, Hoenig and Fisher effectively represent bankers from Middle America. Hoenig repeatedly has talked about the tilted financial playing field that benefits Wall Street banks over Main Street banks. Fisher said Wednesday that megabanks pose such a danger that they can spread "debilitating viruses throughout the financial world," reiterating his call that megabanks should be broken up. "I have a lot of sympathy for what they're saying," Bullard said. "I do kind of agree that 'too big to fail' is 'too big to exist'. The only thing that's making me hesitate about that are the details about how you would split up firms [and] why would you make them split up one way as opposed to another way.

"I haven't seen a lot on that, but I'm very sympathetic," he said. "But the devil's in the details about how you would actually break them up." Hoenig has called for a partial return to the Glass-Steagall Act, the Depression-era law repealed at the urging of Clinton administration officials that long separated traditional banking from capital markets activities. A restoration of that divide, plus some additional action by policymakers, will break up today's megabanks, he says. Fisher wants an "international accord to break up these institutions into ones of more manageable size -- more manageable for both the executives of these institutions and their regulatory supervisors." But if that's not possible, the U.S. should act unilaterally and go it alone, he said. Fisher suggested a ceiling on assets placed at $100 billion.

There are 23 bank-holding companies in the U.S. with more than $100 billion in assets, according to Federal Reserve data. The top 12 banks in the U.S. control half the country's deposits. By comparison, it took 25 banks to accomplish this feat in 2003 and 42 banks in 1998, according to a Jan. 4 research note by Jason M. Goldberg of Barclays Capital. Bank of America, JPMorgan Chase, Citigroup and Wells Fargo collectively hold about $7.4 trillion in assets, according to the most recent regulatory filings with the Federal Reserve. That's equal to about 52 percent of the nation's estimated total output last year.

"I think they should be broken up," Hoenig said in a March interview with the Huffington Post. "I think there's no reason why as we've done in other instances of [sic] finding the right mechanism to break them into their components." "And in doing so, I think you'll make the financial system itself more stable. I think you will make it more competitive, and I think you will have long-run benefits over our current system, [which] mixes it and therefore leads to bailouts when crises occur," Hoenig said.

Fisher said that "based on my experience at the Fed... the marginal costs of TBTF financial institutions easily dwarf their purported social and macroeconomic benefits. The risk posed by coddling TBTF banks is simply too great. "Winston Churchill said that 'in finance, everything that is agreeable is unsound and everything that is sound is disagreeable.' I think the disagreeable but sound thing to do regarding institutions that are TBTF is to dismantle them over time into institutions that can be prudently managed and regulated across borders," Fisher said. "And this should be done before the next financial crisis, because we now know it surely cannot be done in the middle of a crisis."

That kind of fundamental reform -- and candid talk -- is largely absent in Washington, where policymakers and the majority of legislators support maintaining the dominance and size enjoyed by today's global financial institutions. At least two Clinton-era officials in office at the time Glass-Steagall was repealed -- Larry Summers and Timothy Geithner -- now serve at the highest levels in the Obama administration: Summers, as Obama's top economic adviser, serves as director of the National Economic Council while Geither is the Secretary of the Treasury. But between Bullard, Hoenig and Fisher, at least three of 12 regional Fed presidents are calling for megabanks to be broken up. That's 25 percent of the Federal Reserve system's leadership.

The biggest U.S. commercial banks will take their fight against disclosure of Federal Reserve lending in 2008 to the Supreme Court if necessary, the top lawyer for an industry-owned group said.Continued legal appeals will delay or block the first public look at details of the central bank’s $2 trillion in emergency lending during the 2008 financial crisis. The Clearing House Association LLC, a group that includes Bank of America Corp. and JPMorgan Chase & Co., joined the Fed in defense of a lawsuit brought by Bloomberg LP, the parent company of Bloomberg News, seeking release of records related to four Fed lending programs.

The U.S. Court of Appeals in Manhattan ruled March 19 that the central bank must release the documents. A three-judge panel of the appellate court rejected the Fed’s argument that disclosure would stigmatize borrowers and discourage banks from seeking emergency help. “Our member banks are very concerned about real-time disclosure of information that could cause a run on the banks,” said Paul Saltzman, the group’s general counsel, in an interview yesterday. “We’re not going to let the Second Circuit opinion stand without seeking a review.” Regardless of whether the Fed appeals, the Clearing House will take the next legal step by asking for a review by the full appellate court, Saltzman, 49, said at his office in New York. If the ruling is unfavorable, the bank group will petition the Supreme Court, he said.

The 157-year-old, New York-based Clearing House Payments Co., which processes transactions among banks, is owned by its 20 members. They include Citigroup Inc., Bank of New York Mellon Corp., Deutsche Bank AG, HSBC Holdings Plc, PNC Financial Services Group Inc., UBS AG, U.S. Bancorp and Wells Fargo & Co. The Clearing House Association, a lobbying group with the same members, joined the lawsuit in September 2009, after an initial ruling against the central bank in federal court in Manhattan. The Fed is “reviewing the decision and considering our options,” said Fed spokesman David Skidmore in Washington. He had no comment on Saltzman’s plans.

Attorneys face a May 3 deadline to file their appeals. “We’ll wait to see the motion papers,” said Thomas Golden, attorney for Bloomberg who is a partner at New York- based Willkie Farr & Gallagher LLP. “The judges’ decision was well-reasoned, and we doubt further appeals will yield a different result.” Bloomberg sued in November 2008 under the U.S. Freedom of Information Act, after the Fed denied access to records of four Fed lending programs and a loan the central bank made in connection with New York-based JPMorgan Chase’s acquisition of Bear Stearns Cos. in March 2008.

The central bank contends that 231 pages of daily reports summarizing lending activity, which were prepared by the Federal Reserve Bank of New York for the Fed Board of Governors in Washington, aren’t covered by the FOIA. The statute obliges federal agencies to make government documents available to the press and the public. The suit doesn’t seek money damages. The Fed released lists on March 31 of assets it acquired in the 2008 bailout of Bear Stearns.

The New York Times Co., the Associated Press and Dow Jones & Co., publisher of the Wall Street Journal, are among media companies that have signed up as friends of the court in support of Bloomberg.The Fed Board of Governors’ “refusal to disclose the names of borrowers renders public oversight of its actions impossible -- it prevents any assessment of the effectiveness of the Board’s actions and conceals any collusion, corruption, fraud or abuse that might have occurred,” the news organizations said in a letter to the appeals panel. The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 09-04083, U.S. Court of Appeals for the Second Circuit (New York).

The worst global financial crisis in 70 years arrived in Saint-Etienne this month, as embedded financial obligations began to blow up.

A bill came due for 1.18 million euros ($1.61 million) owed to Deutsche Bank AG under a contract that initially saved the French city money. The 800-year-old town refused to pay, dodging for now one of 10 derivatives so speculative no bank will buy them back, said Cedric Grail, the municipal finance director. They would cost about 100 million euros to cancel today, he said.

"It's a joke that we're in markets like this," said Grail, 38, from the 19th-century city hall fronted by an arched facade and the words Liberte, Egalite, Fraternite. "We're playing the dollar against the Swiss franc until 2042."

Saint-Etienne is one of thousands of public authorities across Europe that tried to shave borrowing expenses by accepting derivatives deals whose risks they couldn't measure. They may be liable for billions of euros, according to the Bank of Italy and consulting and law firms in France and Germany. As global economies climb out of recession, the crisis is hitting Saint-Etienne in central France, Pforzheim in western Germany and Apulia, an Italian regional government on the Adriatic. They may pay for their bets into the next generation.

Alabama's Jefferson County

From the Mediterranean Sea to the Pacific coast of the U.S., governments, public agencies and nonprofit institutions have lost billions of dollars because of transactions officials didn't grasp. Harvard University in Cambridge, Massachusetts, agreed last year to pay more than $900 million to terminate swaps that assumed interest rates would rise.

For Jefferson County, Alabama, the day of reckoning came earlier than in Saint-Etienne, but the common denominator was the use of complex, unregulated financial instruments known as derivatives that are typically linked to changes in market interest rates, currencies, stocks or bonds. Billionaire investor Warren Buffett, chairman of Berkshire Hathaway Inc., in 2003 called derivatives "financial weapons of mass destruction."

They pushed Jefferson County close to bankruptcy two years ago. It had refinanced $3 billion of debt with variable-rate bonds and purchased interest-rate swaps to guard against borrowing costs rising. Its interest rates soared when insurers guaranteeing the bonds lost their top credit grades, and the rate the county received under the swap deals fell.

Under the interest-rate swap deals popular with European municipalities, a bank would agree to cover a locality's fixed debt payment and the government or agency would pay a variable rate gambling its costs would be lower -- and taking on the risk that they could be many times higher.

'Hopes of Gain'

The deals were often based on differences between short- and long-term rates or currency movements.

"This is speculating in the hopes of gain," said Peter Shapiro, managing director at Swap Financial Group LLC, in South Orange, New Jersey, an adviser to companies and governments. "The investor is taking a chance in hopes of a high return. It has nothing to do with hedging."

Use of swaps in Europe soared in the late 1990s and early 2000s because banks pitched them as the easiest way to reduce costs on fixed-rate loans, according to Patrice Chatard, general manager of Finance Active, which helps more than 1,000 localities across Western Europe manage their debt.

The financial institutions that sold the derivatives were many of the same ones that received government bailouts to weather the worst global credit crisis since the 1930s.

1.21 Trillion Euros

They include the Royal Bank of Scotland Group Plc and Dexia SA, based in Brussels and Paris. Frankfurt-based Deutsche Bank, which packaged and resold subprime U.S. mortgage loans and sold swaps in Europe, didn't take government funds.

City and regional governments in Europe mainly get their financing from banks, while in the U.S. they primarily raise funds by selling bonds to investors. Municipalities and other local authorities in the European Union's 27 member states had a combined debt of 1.21 trillion euros in 2008, according to Eurostat, the EU's statistics agency.

Government officials used up-front cash payments from guaranteed rates at the beginning of swap contracts to artificially lower their short-term financing costs and live beyond their means, said Emmanuel Fruchard, who is a city council member in Saint-Germain-en-Laye, near Paris.

"These municipal swaps are the same thing as Greece," said Fruchard, a former banker at Credit Lyonnais, now a unit of Credit Agricole SA, who designed swaps in the early 1990s. "It's all trying to dress up your accounts."

Greek Rescue

Greece, plagued by tax evasion and soaring pension costs, made a series of agreements with banks to help defer interest payments, helping to understate its budget deficit for years, the finance ministry reported in February. The country's credit ratings were cut in December after estimates for the 2009 deficit doubled. Greece imposed new levies on large companies, raised the value-added tax, increased tariffs on fuel, alcohol and tobacco and cut public-employee wages to shrink the shortfall and restore investor confidence in its debt.

Those measures didn't work. The yield demanded by investors on 10-year Greek bonds soared to 7.36 percent by April 8, from 4.42 percent six months earlier, while the euro fell by 9.7 percent against the dollar over the same period. European governments on April 11 offered Greece a rescue package worth as much as 45 billion euros at below-market interest rates in a bid to stem its fiscal crisis and restore confidence in the euro.

12 Percent Cut

Germany, Italy, Poland and Belgium also used derivatives to manage fiscal deficits, Walter Radermacher, the head of Eurostat told EU lawmakers in Brussels yesterday without being specific.

Municipalities are having to rewrite their budgets. Saint- Etienne raised taxes twice, slashed by three-fourths a plan to renovate a museum commemorating the region's extinct coal mining industry and sparked the cancellation of a tram line. Pforzheim, on the edge of the Black Forest in Germany, is scrimping on roads, schools and building renovations.

Known as Gold City for its historic jewelry and watch- making industry, Pforzheim was ordered by the Baden-Wuerttemberg regional government office in Karlsruhe to cut its budget by 240 million euros, or about 12 percent annually, over the next four years because of a 55 million-euro loss on derivatives and a projected 50 million-euro annual shortfall from a decline in tax revenue and rising social costs.

The town followed the advice of Deutsche Bank in taking out bets on interest rates in 2004 and 2005, according to Susanne Weishaar, Pforzheim's budget director until March.

'Painted Hand Grenade'

The bank gave her a 10-year chart showing long-term rates were consistently higher than short-term, she said. During an initial phase of guaranteed rates, the town paid 1.5 percent to the bank on 60 million euros of debt while receiving 3 percent to 3.75 percent.

In 2005 and 2006, the difference between long- and short- term rates collapsed. As potential losses soared in 2006, Weishaar bought more swaps from JPMorgan Chase & Co. in a vain attempt to protect the town budget. Today Pforzheim owes 55 million euros to New York-based JPMorgan, she said. That's 11 percent of this year's spending.

The Deutsche Bank swaps have a positive value for the city of about 9 million euros, Weishaar said, offset by the negative value of JPMorgan swaps set up to protect the city.

"It's like Easter eggs," said Weishaar, 45, who holds a degree in math and economics from the University of Ulm. "You want to buy one and somebody sells you a painted hand grenade instead."

If the grenades explode -- or when local officials decide to cut their losses and get out of long-term contracts when the market is against them -- taxpayers foot the bill.

Risks Versus Savings

More than 1,000 municipalities in France had 11 billion euros in "risky" contracts at the end of 2009, according to Paris-based Finance Active. In Italy, about 467 public borrowers faced losses of 2.5 billion euros on derivatives as of the end of September, according to the Bank of Italy.

In Germany, Deutsche Bank sold contracts based on the difference between long- and short-term rates to about 50 municipal governments and utilities. Local authorities also bought swaps from regional banks and Commerzbank AG. No national consolidated figures exist, according to Roland Simon of Simon & Partner, a law firm in Duesseldorf.

For cities like Saint-Etienne, the risks from buying swaps were out of proportion to the potential savings.

Saving 126,377 Euros

The town borrowed 22 million euros in 2001 from Dexia at 4.9 percent to consolidate borrowings for civic projects. The rate would rise if the benchmark three-month London interbank offered rate, or Libor, exceeded 7 percent.

Under Mayor Michel Thiolliere, Saint-Etienne signed six swap contracts on that loan between 2005 and 2008, the last three with Deutsche Bank. That lowered the city's effective costs to 4.35 percent in 2006, to 4.07 percent in 2007 and 4.3 percent in 2008 and 2009. The difference in 2009 was a saving of 126,377 euros.

The risks in the equation hit the town this month. The contract obligated Saint-Etienne to pony up on April 1 a quarterly payment of 1.18 million euros -- equivalent to an annual 24 percent on the debt -- while Deutsche Bank would pay 241,886 euros. The swap is based on the strength of the British pound against the Swiss franc. The U.K. currency has slumped by 21 percent in the two years since the deal was signed.

"This isn't traditional asset management," Fruchard said in reference to swaps based on currency moves in general. "It's speculative, like a hedge fund. And it's done in bad faith. An elected official who takes the benefit from the guaranteed low rates without understanding what happens after his mandate ends is acting in bad faith."

Fighting Deutsche Bank

Saint-Etienne sued Deutsche Bank in November, alleging the bank had failed to warn officials with sufficient detail of the risks in the contract, and claiming the city didn't have the right to sign the agreement because it was "speculative."

The city hasn't paid what it owes the bank, and returned Deutsche Bank's January net payment of 30,735 euros, according to Chantal Bayet, who is in charge of debt service and financial analysis. Saint-Etienne has increased the amount it has set aside for financial risks to 6.5 million euros, from less than 400,000 euros in 2008.

Deutsche Bank disputed the claims. "Deutsche Bank, as in any transaction of this kind, worked closely with the client to ensure that risks and opportunities of the transaction were well understood by all parties," the bank said in a statement in November. The bank has no further comment, spokesman Christian Streckert said in an e-mail.

'Daily Risks'

For his part, Thiolliere had little choice for reducing Saint-Etienne's interest costs, he said. After the area's last deep coal mine closed in 1983, the city faced terminal decline, he said. The local team in France's top professional soccer league holds the record for championships with 10 but hasn't won since 1981.

"Managing a town is like running a company: It's taking risks daily," said Thiolliere, mayor for 14 years before being voted out of office in 2008. He still represents the Loire region in the French Senate.

Accounting rules in Europe help keep derivatives deals hidden. Most local governments have no obligation to set aside cash against potential losses, and reflect only current-year cash flows in balance sheets.

"It's only transparency that will make elected officials scared to invest in dangerous products," said Jean-Christophe Boyer, deputy mayor of Laval, in western France, which has swaps covering about 25 percent of its total debt of 86 million euros. "Even if we banned them today, the impact is coming now, tomorrow and 10 years from now," he said, because of the number of derivatives contracts still in force.

Ban on Swaps

European towns desperate for cash jumped into the global derivatives experiment that loaded the financial system with leverage and led to the credit crisis in late 2008. Epitomized by Lehman Brothers Holdings Inc.'s collapse, the fallout cost banks and brokerages alone $1.28 trillion in writedowns and credit losses, according to data compiled by Bloomberg, and required at least $15 trillion in support from central banks and governments in the U.S., the U.K. and the euro zone, based on Bank of England data.

Efforts to regulate derivatives sales to local governments are patchy. The European Commission isn't working on EU-wide rules. In France, the central government oversaw a voluntary good-conduct charter, inked in December, that wasn't signed by all banks operating there nor by all local government associations. In Italy, a Senate committee in March proposed a ban on swaps for smaller towns except for provincial capitals.

Generational Impact

A judge charged Deutsche Bank, JPMorgan, Zurich-based UBS AG and Depfa Bank Plc with fraud linked to the sale of derivatives to the City of Milan, Italy's financial and fashion capital. The trial is scheduled to start May 6.

Deutsche Bank spokesman Streckert referred to the firm's March statement that said, "We continue to believe that our case is compelling and that we will be cleared." JPMorgan spokesman David Wells declined to comment.

"We are convinced that neither Depfa nor the accused employees have violated any law or regulation," Depfa's parent, Hypo Real Estate Holding AG, said in an e-mailed statement last month. Spokeswoman Nina Lux said the company stands by that. UBS reiterates its March statement that "no fraud was committed by UBS nor by any of its exponents," spokesman Richard Morton said in an e-mail.

'Shouldn't Buy It'

The use of derivative contracts by some Italian municipalities will weigh on their debt for "generations," said Tullio Lazzaro, chairman of the state audit court, on Feb. 17 in Rome.

Under the French voluntary agreement, banks pledge not to sell local authorities interest-rate contracts based on debt principal, commodities or foreign currencies. The accord also excludes so-called snowball swaps, which move in steps where each payment is based on the previous payment. This works to magnify any trend. Calculations in swaps also may contain multipliers that exaggerate any change.

"I'm not against all structured products, but if you can't explain the real utility to a mayor in under a minute, you shouldn't buy it," said Sandra de Pinho, finance director for the city of Lille in northern France.

Understanding agreements like these requires complex software, mathematical and financial expertise that local governments often don't have, said Fruchard, the former banker.

Snowball Swaps

Take Saint-Etienne's two snowball swaps with Royal Bank of Scotland. In one of the contracts, the town pays a fixed rate of 3.92 percent until May 2011 on an underlying debt of 7.2 million euros while RBS pays 9.69 percent, less 10 times the difference between 10-year and 2-year interest rates, capped at 12 percent and with a floor at zero.

The contract with RBS was a counter-agreement for a swap that Saint-Etienne had signed with Paris-based Natixis SA. The swaps are based on an underlying loan by Dexia at 4.94 percent that runs until 2026.

Under the other contract, Saint-Etienne is paying 3.77 percent until June 2011 on 8.3 million euros while RBS picks up the payment of 9.71 percent less the same formula in the previous swap. The underlying loan from Dexia is also at 4.94 percent and lasts until 2026.

Permanent Rate Increase

After the dates specified in both contracts, the city each quarter must pay the previous rate if the difference between the 20-year constant maturity swap rate less the three-month Euribor rate, another interest-rate benchmark, is greater than or equal to negative 0.3 percentage point. If that rate is less than negative 0.3 percentage point, Saint-Etienne must pay the previous rate plus three times the difference between 0.1 percentage point and the 20-year versus 3-month spread. Any increase is permanent until the contracts end in 2020 and 2021.

Saint-Etienne would need to pay RBS 3.18 million euros to cancel the first snowball swap and 4.05 million euros to cancel the second, according to a Jan. 29 presentation by the mayor's office.

Claire Gorman, a spokeswoman for RBS, declined to comment on the contracts, discussions with Saint-Etienne or on the bank's policies on sales of derivatives to local governments.

Saint-Etienne asked Eric Gissler, a French finance ministry official named last year to mediate disputes over swaps, to help negotiate a settlement with Natixis, according to Jean-Claude Bertrand, the deputy mayor in charge of finances since 2008. The town has been unsuccessful in discussions to alter its contracts with RBS, he said.

Looking for Deals

Saint-Etienne has derivative contracts with at least six banks, according to a chart of the city's finances. "They put people into competition with each other in some ways and searched for products with different characteristics," said Christian Le Hir, chief legal officer for Natixis.

Natixis is ready to negotiate with Saint-Etienne under the aegis of the mediation system set up by the French government, he said. The voluntary charter creates a level playing field for banks and will prevent local governments from signing inappropriate contracts, he said.

Speaking generally about what happened in municipal finance and not specifically about Saint-Etienne, Le Hir said banks and local governments were both looking for deals.

"Banks were looking to sell products," Le Hir said. "Local governments were looking to buy them because it suited them, at least in the short term, with accounting rules that weren't suitable and a government that didn't look into these transactions because local authorities needed to refinance themselves with better conditions. It was a whole context."

Renegotiation Pattern

Saint-Etienne and other towns renegotiated their finances repeatedly. After Thiolliere lost local elections in 2008, the new administration discovered Saint-Etienne had at least 26 swaps, many of them renegotiated several times, according to the complaint the city filed against Deutsche Bank.

"The number of people who believed, in good faith, even in big cities, that when you renegotiate your debt you win, is crazy," said Michel Klopfer, the author of "Financial Management for Local Governments," a how-to handbook used throughout France. Klopfer has consulted for 31 out of the 37 French cities with more than 100,000 residents. "Banks accelerated their renegotiation proposals while making clients believe, incredibly, that renegotiating means winning."

For Dexia, the largest lender to local governments in France and Belgium, "restructuring debt was an important factor in the profitability of this business in the past," said Pierre Mariani, the bank's chief executive officer, on a Feb. 24 conference call. "It will continue, but in safe conditions for the bank and for our clients."

Pforzheim Deals Probed

It would cost Saint-Etienne 20 million euros today to cancel the Deutsche Bank swap, Grail said, while still leaving the town to pay off the 19 million euros left in the underlying loan from Dexia.

"Our goal isn't to go to war with the banks," Grail said. "Our goal is to protect Saint-Etienne citizens from the aberrant decisions made by the prior team."

Pforzheim, a town of 117,000 that traces its history back 1,900 years to Roman times, hasn't sued Deutsche bank over its swap deals. The Mannheim prosecutors' office is investigating Weishaar, the former budget chief, and former Mayor Christel Augenstein over the decision to buy the swaps, according to Peter Lintz, a spokesman.

'They Cheated Me'

Augenstein denied any wrongdoing, saying she relied on the advice of Deutsche Bank. Weishaar said she did nothing wrong, and that she thought Deutsche Bank's 10-year chart on interest rates was misleading. Her resignation in November took effect at the end of March.

In December 2004 and August 2005, Deutsche Bank sold Pforzheim three contracts known as spread-ladder interest-rate swaps, Weishaar said. The transactions functioned in part like the snowball swaps that Saint-Etienne bought because each period's rate was based on the previous rate, plus a formula.

Weishaar was trying to reduce the town's costs on 60 million euros of debt so it could spend more on education, she said. The contracts hinged on the difference between short-and long-term interest rates.

What went wrong was that short-term rates rose faster than long-term rates. The European Central Bank doubled short-term rates to 4 percent from 2 percent between December 2005 and June 2007. This caused the spread compared with long-term costs to narrow to 0.07 point by October 2006 from 0.63 point on Dec. 1, 2005, faster than Weishaar says she expected.

Counter-Swaps

The amount that Pforzheim potentially owed surged to 20 million euros in October 2006 from 644,000 euros a year earlier, Weishaar said, scanning spreadsheets on the computer screen in her home office. After that, she decided to try to protect Pforzheim from any further losses, she said.

Johannes Banner, a banker at JPMorgan in London, had given a presentation on swaps at a conference in Potsdam, Germany, attended by one of Weishaar's colleagues. Weishaar called Banner, explained the contracts she held, and asked him to come up with a way to limit the town's exposure, she said. The bank set up a series of contracts capping Pforzheim's loss at 77.5 million euros.

"We didn't have the money to buy out the Deutsche Bank contracts, but we had to limit the danger," Weishaar said. "Even if the cap was very high, at least it was a cap."

JPMorgan's Wells declined to comment.

Three-Decade Payback

JPMorgan set up swaps as the exact reverse of the Deutsche Bank contracts. Pforzheim agreed to pay 77.5 million euros to JPMorgan beginning in 2014, less the value of three options.

In February, the city council voted to cancel that contract and pay off the net 54.96 million euros it owed to JPMorgan at the time, said Bernhard Enderes, head of human resources, who led internal investigations by the city into the way the debt was handled. It decided to borrow the funds at a fixed rate over 30 years to cover the cost, Enderes said.

That would cost about 3 million euros a year for the next three decades, or the same as the combined annual operating budgets of the city library and jewelry museum. Enderes hasn't yet secured the loan or paid JPMorgan, according to Michael Strohmayer, a spokesman for the town.

Deutsche Bank wouldn't discuss its dealings with Pforzheim. Standard warnings in the bank's spread-ladder swap contracts with local governments included: "A worst-case scenario cannot be quantified" and said there was a "theoretical risk of unlimited losses." It's written in bold face on the fourth page of six in a typical term sheet obtained by Bloomberg News.

Likely to Lose

Clients were aware of the potential benefits and risks, said Christian Duve, a lawyer representing Deutsche Bank in German cases over spread-related swaps.

"Six separate appellate courts in Germany have ruled that the bank provided all necessary information to the municipalities and companies and have dismissed their claims," Duve said in an e-mailed statement.

A German appeals court said in a Feb. 26 ruling that Deutsche Bank didn't provide enough information to a corporate customer, who wasn't identified. The bank constructed the swap so that the customer was likely to lose money, the court found. The appeals court, the Stuttgart Higher Regional Court, ordered Deutsche Bank to pay 1.5 million euros. The bank appealed.

Pforzheim, bombed by the British Royal Air Force in the final months of World War II, will cut investment spending by about 80 million euros between 2010 and 2013 to compensate for losses on swaps and slumping revenue from changes to local tax law, the city said in March.

'Real Pain'

It has postponed until at least 2014 the construction of a sports complex for the Hilda-Gymnasium school, scrapped 11 million euros of planned refurbishments for Nordstadtschule, a vocational school, and canceled plans to turn a century-old building into a design and business center.

"We trusted Deutsche Bank that the transactions complied with all applicable laws and weren't speculative," Augenstein, the former mayor, said. "Otherwise, I would never have agreed to them."

In Saint-Etienne, the consequences of losing gambles on rates include tax increases of 7.5 percent in 2009 and 2 percent this year. The government slashed 19 percent, or 50 million euros, from its 2008-2014 investment plan. The city reduced by three-quarters an 80 million-euro project to update the museum commemorating the coal-mining industry, Bertrand said. Its woes forced the cancellation of a 120 million-euro plan for a new tram line, he said.

"The real pain for us is just starting now and is coming over the next several years," said Grail, the finance director.

Saint-Etienne's guaranteed rates under eight remaining swaps or structured loans end between this month and September 2012, while one allows the city to pay nothing until 2020.

"The problem is no bank today will take on a swap where you're betting on 10 times the yield curve, or on foreign currencies," Grail said. "So we're stuck, and the explosions are starting to go off."

"Here's all I'm trying to say: The planet on which our civilization evolved no longer exists," asserts environmentalist Bill McKibben in his new book, Eaarth: Making a Life on a Tough New Planet. "The earth that we knewthe only earth we ever knewis gone." According to McKibben, we are about to find ourselves living on a much less friendly planet he calls "Eaarth." Why? Because the climate is about to get really freaky due to man-made global warming and we're also about to run out of oilthe apocalypse, courtesy of Peak Temperature and Peak Oil combined. McKibben is no stranger to environmentalist jeremiads, having declared The End of Nature back in 1989 due to global warming and the rise of biotechnology. Twenty years later he's declaring the end of civilization, at least, as we know it.

Eaarth follows the time-honored structure of environmentalist tracts, opening with a quick rehearsal of the science that allegedly seals our terrible fate, followed by a much longer disquisition outlining the author's elaborate plan for salvation. But to give McKibben some credit; unlike many prior doomsters, such as Paul Ehrlich or climatologist Stephen Schneider, McKibben doesn't argue for top-down centralized salvation. Instead he thinks that the situation is so dire that centralized solutions will fail and that we'll have to return to living in villages and farmsto become 21st century peasants.

Melting arctic ice, expanding tropics, melting mountain glaciers, acidifying oceans, worse hurricanes, and rising seas are all cited as evidence of impending doom by McKibben. All of these things, with the exception of worse hurricanes, are happening. For example, according to the National Snow and Ice Data Center, for instance, the arctic ice cap has been melting away at a rate of about 3 percent per decade since 1978. New research does suggest that a lot of this melting can be attributed to wind shifts rather than directly to global warming. Interestingly, Arctic sea ice recovered this March to almost normal levels. But McKibben is right that global temperatures have been increasing. One set of satellite data shows that global average temperatures have been increasing at a rate of 0.13 degrees Celsius per decade since 1979. Overall, surface records suggest that average temperature has increased by about 0.7 degrees Celsius over the past 100 years.

So he's not wrong about everything. But so eager is he to make his case for doom, McKibben can't resist pushing data farther than it should go. To see how McKibben uses and abuses available data to construct a tale of climate doom, let's examine his treatment of hurricane data. McKibben asserts that "One hundred eleven hurricanes formed in the tropical Atlantic between 1995 and 2008, a rise of 75 percent over the previous thirteen years." Fair enough. But what if one parses the data the way respected hurricane researchers at Florida State University do? Those researchers find globally that the number of major tropical cyclones during the 1980s was 149, in 1990s was 179, and in 2000s was 165. The overall trend is not significant during the past 30 years. The overall numbers for tropical storms: 1980s: 324, 1990s: 367, 2000s: 317. In addition, the actual total energy of tropical cyclones has been declining for the past 30 years. On the other hand, new research by climate modelers suggests that global warming will result in fewer but stronger hurricanes.

To prove that things are getting worse, McKibben cites a 2008 New York Times op-ed which claims that the last 30 years have yielded as many weather-related disasters as the first three quarters of the 20th century combined. The op-ed notes that the U.S. has suffered the most. Sounds bad, right? Sure, but a closer look reveals that annual global mortality from weather disasters has declined from nearly 500,000 per year in the 1920s to 22,000 annually in the early 21st century. The annual mortality rate has dropped from 242 per million in the 1920s to 3 per million. In the U.S., the amount of property damaged by weather events is indeed up, but almost entirely because there is more property to damage and because more people live in coastal areas subject to hurricanes.

With regard to rising seas, the U.N.'s Intergovernmental Panel on Climate Change's Fourth Assessment report estimated that overall rise would likely be between 7 and 23 inches by 2100. In general, sea level has been rising at about 8 inches per century. As to how humanity might cope with rising seas, consider the case of Boston. The National Oceanic and Atmospheric Administration estimates that sea level has been rising at Boston at a rate of 10 inches per century. Yet, the city has not been inundated. In fact, as the accompanying map shows, since 1775 the city has dramatically expanded into areas that were once covered by the sea. In other words, people don't just stand there and drown as the rising waves break over their heads. They adapt and thrive.

Apparently concerned that apocalyptic claims about climate change weren't enough, McKibben dives into resource depletion as well. McKibben nostalgically looks back to The Limits to Growth, a 1972 report from the Club of Rome that describes just what the name suggests. As examples of reaching the predicted limits to growth McKibben cites declining fish catches since the 1990s and peaking per capita grain production in the 1980s. Looking behind these claims, one finds that wild-caught fish production has been falling, but aquaculture has been boosting overall supplies. The latest report from the U.N.'s Food and Agriculture Organization finds in 1970 that per capita fish consumption was around 11 kilograms per person; in 2006, it had risen to around 17 kilograms per person, almost entirely due to aquaculture. And McKibben misses the point entirely that wild-caught fisheries are declining not because their limits were reached but because they have been plundered as open access commons.

With regard to global grain supplies, McKibben is right that per capita supplies peaked in the 1980s, but he fails to mention that overall global grain production has been steadily increasing since the 1970s. After reaching 376 kilograms of grain per person in 1986, even the alarmists at the Worldwatch Institute observed, "In recent decades, as growth in grain production has matched population growth, per capita production has hovered around 350 kilograms per person." Just a note: About a third of all grain is fed to animals to produce meat.

So what to do in the face of all this doom and gloom? "We'll need, chief among all things, to get smaller and less centralized, to focus not on growth but on maintenance, on a controlled decline from the perilous heights to which we've climbed," asserts McKibben. Why? Because climate change will make it more difficult to raise food using modern agriculture and, even more importantly, because we're about to run out of oil to drive our tractors and supply our fertilizers. Thus McKibben concludes that we will have to retreat to small towns and begin to raise food using more labor. He envisions the future on Eaarth as a kind of communitarian back-to-the-land agrarian utopia.

For the sake of argument, let's assume he's right about peak oil; does that mean the era of expansive global civilization and economic growth is over? Not necessarily. Surely one can imagine that transportation might become increasingly electrified, perhaps using new-fangled traveling wave nuclear reactors. This would reduce the demand for oil keeping its price relatively lower for farming uses. In addition, biotechnologists have developed crop varieties that use two-thirds less nitrogen fertilizer than conventional varieties do which would also reduce the demand for oil in farming. In other words, civilization could well save itself by means of technological fixes and economic growth.

McKibben cites a quotation from economist Larry Summers who is now President Barack Obama's chief economics adviser. "There are no limits to the carrying capacity of the earth that are likely to bind any time in the foreseeable future. There isn't a risk of an apocalypse due to global warming or anything else," said Summers in 1999. "The idea that we should put limits on growth because of some natural limit is a profound error." Summers is expressing confidence in human creativity to innovate and to solve problems. In Eaarth, McKibben sees retreat from modernity as our only option because he believes that humanity has reached the limits of our creativity.

70 comments:

I for one have tired of this effort. For two years plus I tried my all to do what I could. Nobody cares, nobody minds. My Dad told me a long time ago "You get what you deserve" and we will get it. The news says "spend! all is well" and folks do! Unreal.

Any effort to make a real change was lost about August of last year. Things will only get bigger now until their final blow up. Good luck to all and I wish you well. And please buy crap you don't need and 3 homes if you can apply for the paperwork.

Interesting you mention foreclosures today, it might be one of the things keeping the economy afloat at this point!

Mark Zandi below

No, not crazy. With some 6 million homeowners not making mortgage payments (some loans are in trial mod programs and paying something but still in delinquency or default status), this is probably freeing up roughly $8 billion in cash each month. Assuming this cash is spent (not too bad an assumption), it amounts to nearly one percent of consumer spending. The saving rate is also much lower as a result. The impact on spending growth is less significant as that is a function of the change in the number of homeowners not making payments.

Credit is declining as seen by the fall in consumer credit for 16/17 months (Being generous here, the 1 missing month was when the data was slightly altered and adjusted a LOT).

So that's one reason why, if a homeowner is not paying the mortgage, that frees up $1,000 - 2,000 dollars or so per month right there! Why not spend, spend, spend. Keeps the cash flow flowing, while Govt borrowing is keeping the cash flowing to the banks. It's an epic shell game. Epic, I tell you.

Touche.And on a completely unrelated and slightly insane note, I love my hot tub as well, I've always seen showers as the epitome of our throwaway, just in time, modern society as compared to the lazy, whenever luxury of agood soak until wrinkly with a favourite album on or a half decent book.I probably need help.

"Both commercial and residential real estate are reaching a bottoming point and possibly even prepared to turn higher, said Gross, CIO of Pacific Investment Management Co., or PIMCO, the world's largest bond fund.

"With stocks likely to return 5 to 6 percent and bonds 3 to 4 percent, he said, investors would be wise to start looking at real estate opportunities."

Perhaps Ilargi could make a bet with Gross, and the loser is required to walk to the top of a mountain.

I must with the greatest of respect disagree with the foreclosure argument as presented.

Several weeks ago, an old friend of mine---from high school---invited me out for dinner. He and his son were on a skiing vacation, and I happen to live relatively close to the resort.

In any event, this fellow has worked for near 25 years in finance. He runs a big hedge fund...AND, he spends countless hours roaming the halls of the Federal Reserve speaking with some of the biggest players in the game.

So, as you can imagine, during our evening out the conversation naturally gravitated to thoughts on the global economy. I of course opined on the current and impending impacts of massive debt-deflation and of unserviceable public and private debt, etc. He listened patiently, quietly sipping his surprisingly cheap glass of Scotch. And then he hit me with this (I'm paraphrasing):

"...Public debt is a non-issue. Deficits are an on-issue. China is a non-issue. 'We' will continue to add money to any and all reserve accounts. There is no limit on how much money the FED can create. None. All of the clamor to the contrary is nonsense..." And this fellow talks to the highest of highest-ups about this very issue. He isn't shooting his mouth off. Not his style.

So....what's MY takeaway here: MY takeaway is that foreclosures as such will be 'monetized' away, at least over the near and midterms. We know that banks have been loathe to foreclose on many homes because many underwater homes are also carrying HELOC's, and those loans would be 100% unrecoverable. HOWEVER, the government can...and in my opinion WILL, begin covering these positions.

The U.S. government is stuffing the IMF coffers with hundreds of billions of NEW dollars, the U.S. government is lobbying to back Fannie and Freddie with 100% government surety, the U.S. government is literally adding hundreds of billions of dollars to the accounts of untold thousands of financial and other institutions----all in an effort to stave off collapse, and all done with the belief that these computerized additions to the aforementioned accounts has NO impact upon the viability of the dollar.

I do not think foreclosure is going to be the issue that it would appear to be---because in the near term, the neo-Keynesians will simply inject monies where needed in order to minimize the social impact of the crisis.

The issue, as I see it, is that we are in a Depression, and it is ONLY because of our fiat currency (and food stamps, and unemployment insurance) that we haven't imploded into utter chaos.

The question remains, however: Under these policies, how long can the dollar remain a currency of any real worth. Given the global state of affairs, and given the economic power of the USA, I think it may be far longer than some of us are willing to admit.

Dan Weintraub said...(I'm paraphrasing):"...Public debt is a non-issue. Deficits are an on-issue. China is a non-issue. 'We' will continue to add money to any and all reserve accounts. There is no limit on how much money the FED can create. None. All of the clamor to the contrary is nonsense..." ---- I’m also paraphrasing/ rewording:

We have a financial system which is VIRTUAL!

The markets and the financial system are driven by a handful of interconnected computers using the same and/or comparable programs.

Needs of liquidity in the real world can be obtained/withdrawn from the virtual world without worrying about a crash of the virtual world.

The virtual world does not need to have assets from the real world to continue to exist.

You are seeing the birth of THE MATRIX. (not s-f)Your children and grandchildren will have the choice of getting “PLUGGED IN” and live a blissful life.

The New York Stock Exchange will implement new circuit-breaker collar trigger levels for first-quarter 2010 effective Friday, January 1, 2010.Circuit-breaker points represent the thresholds at which trading is halted marketwide for single-day declines in the Dow Jones Industrial Average (DJIA). Circuit-breaker levels are set quarterly as 10, 20 and 30 percent of the DJIA average closing values of the previous month, rounded to the nearest 50 points. In first-quarter 2010, the 10-, 20- and 30-percent decline levels, respectively, in the DJIA will be as follows:

Level 1 Halt An 1,050-point drop in the DJIA before 2 p.m. will halt trading for one hour; for 30 minutes if between 2 p.m. and 2:30 p.m.; and have no effect if at 2:30 p.m. or later unless there is a level 2 halt.

Level 2 Halt A 2,100-point drop in the DJIA before 1:00 p.m. will halt trading for two hours; for one hour if between 1:00 p.m. and 2:00 p.m.; and for the remainder of the day if at 2:00 p.m. or later.

Level 3 Halt A 3,150-point drop will halt trading for the remainder of the day regardless of when the decline occurs.

Background:Circuit-breakers are calculated quarterly. The percentage levels were first implemented in April 1998 and the point levels are adjusted on the first trading day of each quarter. In 2009, those dates have been Jan. 2, April 1, July 1 and Oct. 1.

Dan Weintraub- an excellent anecdote, extremely well related. I may add it to my collection, either way.

My collection is mainly of anecdotes from insiders involving top scientists, covered with honors, who wound up fiercely defending positions which turned out to be completely false.

Just keep in mind that that is a well documented occurrence. While your friend's statements should certainly be respected- you still have the need to examine the problem yourself; bottom to top. Does his opinion actually make sense? Once you excise the weight of his opinion?

From MY perch, my friend's opinions are an absurdity---literally. HOWEVER, our entire existence viz global finances and fiat currencies are an absurdity. The primary absurdity (insanity???) being that money has become completely divorced from productive capital.

HOWEVER...upon investigation, why couldn't my friend be correct, at least for another decade or so? The U.S. remains the global economic hegemon---despite claims by some that China has usurped this position. Why WOULDN'T the world continue to pretend that more zeros added to their reserve accouts at the FED mean more money to spend---real money, that works.

"...Public debt is a non-issue. Deficits are an on-issue. China is a non-issue. 'We' will continue to add money to any and all reserve accounts. There is no limit on how much money the FED can create. None. All of the clamor to the contrary is nonsense..." And this fellow talks to the highest of highest-ups about this very issue. He isn't shooting his mouth off. Not his style.

Not shooting his mouth off, but reciting the standard position based on neo-classical economics, the foundations of which I profoundly disagree with.

Public debt will blow up in all OECD countries when interest rates rise even modestly, as they inevitably will. I don't doubt that printing will occur eventually, but we have a period of masive deleveraging to live through first, and that can play out quickly once a kind of critical mass in herd perception has been reached. It is literally possible for the global banking system to seize up in a matter of hours. This is why we tell people to prepare well in advance. The risk of hanging on too long is huge.

Foreclosures will contribute significantly to the freezing up of the housing market (ie real estate going illiquid). There are many other asset markets that will follow the same fate. Deflation occurs as value disappears in these markets, but only becomes apparent once a new sale happens at a new and much lower price. This amounts to price discovery, and it can wipe out tens or hundreds of billions of dollars of virtual value almost overnight. No one can print quickly enough to prevent that dynamic from taking hold.

Deflation is a psychological phenomenon. The economy is not a machine with obvious levers to pull as conventional economists would have you believe. It is an irrational and emotional human construct that follows the tenets of herding behaviour. Collective mood can turn on a dime, and when it does no central authorities will be able to stem the tide. If it were possible to print one's way out of deflation, then it would never be experienced anywhere.

I AGREE with all of your points...ALL OF THEM! My primary argument---if it can be called that---is that the neo-classical or post-Keynesian view being EMPLOYED in Washington has the potential to 'kick that can' for a pretty long while. The folks running the show are truly in a state of deep and abiding peace-of-mind...they believe that their monetary policies CAN stave off even the worst crisis. This belief, in itself---and in concert with the printing presses---has some power.

If there are no limits to what the Fed can/will print then it is moot how much deleveraging takes place. The Fed will simply print. The effect will not be hyper-inflationary because if you take away one and add one, the net effect is zero.

"...Public debt is a non-issue. Deficits are a non-issue. China is a non-issue. 'We' will continue to add money to any and all reserve accounts. There is no limit on how much money the FED can create. None. All of the clamor to the contrary is nonsense...“

Well, we’ve heard these religious voices before, haven’t we? Why on earth we’re in a depression in the first place if what they say would be true is beyond me. Just hand out the stuff all around every morning at 9 AM sharp, everybody’s happy.

Keeping up hugely inflated home prices at all cost has de facto been declared a matter of national security.

I'm beginning to believe that (implied) national security was utilized only as a means to divert attention away from the true cause(s).

The question is really becoming one of how much longer can hoocoodanode be used to rationalize & explain the continuing series of 'unexpected' results?

At what point do we begin to grasp that given the underlying mathematical certainty of compounding debt, the events we currently see transpiring were absolutely locked in years/generations ago?

So to what purpose was pretend & extend even implemented? Was it nothing more than to engage public entities (national governments) into levering the last layers of un-payable debt which had previously outrun the private sector?

If so, then the ultimate crash has always been known. Since it affects sovereign nations this time around, can we conclude that these actions were intentional? If so, to what end were they engaged?

I of course tend to agree with you and Stoneleigh...my only point is that the monetary operations of our fiat system can keep things from falling apart for a very long time...and yes, I mean falling apart for virtually ALL; the 'little guy' is already under terrible stress. Take it from a man who just accepted a job offer 1500 miles away from his wife and kids.

My primary argument---if it can be called that---is that the neo-classical or post-Keynesian view being EMPLOYED in Washington has the potential to 'kick that can' for a pretty long while. The folks running the show are truly in a state of deep and abiding peace-of-mind...they believe that their monetary policies CAN stave off even the worst crisis. This belief, in itself---and in concert with the printing presses---has some power.

I agree that view is what is being employed and that those who do so believe (relatively serenely) in the power of their strategy. I disagree that it will work. IMO it only works when public mood supports that outcome. Rallies do wonders for the perceived competence of the powers that be, but declines are unkind to them. Then everything they try to do will fail conspicuously, and they will look more and more desperate, which of course feeds fear even more in a positive feedback spiral.

Printing presses will not be deployed while the bond market retains the power to punish, and that will be the case for some time. After a deleveraging great enough to break the power of the bond market it wold be a different story, but that is then and this is now.

An existing positive mood is not a driver of future upward momentum, but a lagging indicator of past upward momentum. It is indicator that recovery has become received wisdom, and the greater the extent to which that is true, the closer we are to a trend change. I would argue that we are very late in the day for this rally. Upheaval is coming and we need to be prepared.

It seems your friend was somewhat cryptic with his explanation. Even the arch-cynics at Zero Hedge don't paint it so simply as electronic credits to "reserve accounts." The critical consensus seems to be: the Fed will maintain a steep yield curve (which is easier when the goverment is borrowing like crazy) to let the banks gradually earn their way out of their bad debts, however long it takes. The penalty is borne by regular people who earn nothing on their savings. ZH calls it a transfer of capital from the middle class to the banks. It's exactly the way China dug out of its banking crisis six years ago (according to an article either on TAE or ZH, can't remember.) Not sure if that is what your friend was talking about.

I&S say the value of collateral will keep dropping, faster than the banks can earn their way out with free money. Bill Gross says not (though maybe he is talking his book, or talking the Fed's book as a favor.)

Money printing is the fallback, and the limit is simple: if foreigners stop accepting dollars for purchase of oil, etc. or raise the dollar price of imported necessities, we hit the wall. We become like Eastern Europe in the iron curtain days, losers without a hard currency, standing in line for everything. It's very hard to tell when that would happen, or how much monetization the Fed can get away with. (I have always disagreed with Stoneleigh that interest rates will be the problem. The fed can always limit them by buying bonds, until foreigners stop taking dollars.)

The GS thing is a game changer. This could easily be, at least, a local top. Those retail call buyers (suckers) must be physically ill over this. A lot of charts are going to hell with today's tape. Get your puts now before premiums go through the roof.

Of all the 'black swan events' one could imagine as the the one that would topple the market rally (if indeed this is the case) an SEC charge of fraud against GS is the very last one I would ever have picked. On an OPEX Friday no less. Kind of makes one wonder about internicine fighting at the upper echelons of power here in the USA. Obummer has been in desparate need to recharge some of his former populist cred, but this ..!? We live in scary interesting times.

@ Stoneleigh--Printing presses will not be deployed while the bond market retains the power to punish, and that will be the case for some time. After a deleveraging great enough to break the power of the bond market it wold be a different story, but that is then and this is now.

I'm not good at bonds. I do not understand this paragraph. What is the power to punish of the bond market? Why will the great deleveraging break the power?

Once last thing on the printing topic. There appears to be a persistent notion in America that both the country and its central bank operate in a vacuum. If they were, the printing scenario would be much more viable. But they are not. Moreover, the standing of the US, if we limit ourselves to finance for a moment, has taken a serious beating lately, which has limited wiggle-room considerably.

Another point that seems to be playing into this is the assumption that just about anything the Fed wishes to do can be accomplished in utter secrecy.

@Stoneleigh,I feel that deflation is a manifestation of a psychological group phenomenon with definite yet ill-defined mechanical couplings somewhere, because I assume all monetary interactions have both mechanical and emotional qualities. The failure to print one's way out of deflation does not prove that deflation is not partially mechanical in nature, and only psychological, as the kinetics or monetary kinematics could be beyond understanding or control, especially in their interface with group psychology. Maybe your assertion that no amount of printing could counteract such forces would ideally apply if inflation is specifically less such a psychological affair.

Because if inflation is equally psychologically inducible to some degree, then the fed man may yet have a point, so that they can easily trigger another round of mania at will. That there is no theoretical limit to fed's money creation does not change its complete inability to have it effectively percolated and circulated, which does seem more of a psychological than a macromechanical control issue. You'd think that the process of creating inflation would be more mechanical than emotional in policy, but maybe not.

I selected a 1,768,000$ Vancouver mansion as a crackshack, cause it looked like one, but I'm still a certified realtor, the thing said. So, are these charming rustic properties in a bubble of sorts? Its funny, but the results wont be.

Your friend is thoroughly immersed in the faith and priesthood of modern economics. Of course he believes what he is told.

But let's look at this. The US desperately needs (according to these same neo-classical economists) to devalue its currency versus other world currencies. However, at the same time, the US currency is the global reserve currency.

This presents a conundrum. Devalue too fast and the other nations leave you high and dry and you lose all the power of being the global reserve currency. But if you don't devalue faster than the competition, you remain locked in a deflationary trap.

The only reason the Fed has not massively injected more cash into the system so far is that they would destroy their very own powers over the entire planet. So the question becomes whether they will allow a deflationary depression to overtake us, in order to preserve their own power (because the dollar will actually appreciate against other currencies making the Fed even more powerful than it is), or they will take inflationary actions to let the US taxpayer off the hook AND destroy their own power.

Ask yourself that question then look at the psychopaths that run the banking cartel and tell me with a straight face that they will inflate to save us, the little guy, from debt slavery and destroy their own hard-earned power base at the same time.

"In any event, this fellow has worked for near 25 years in finance. He runs a big hedge fund...AND, he spends countless hours roaming the halls of the Federal Reserve speaking with some of the biggest players in the game."

If he truly believes his comments, and roams the halls of FRB, who is running the asylum? These people are in charge? And they think like that?

You aught to understand it better than most. Mankind periodically comes up with new toys and occasionally adopts a new bizarre theory about how things work. But, fundamental human nature doesn't change much, or at least not very fast.

The probable explanation for Blackwater/Xe people being dragged into the dock is quite simple and old as the hills. They made themselves the fair-haired boy, the prodigal son, the indispensable person. That pretty much always engenders a belief that one can do anything they want. That usually leads to embarrassing actions. Changing the name from something cool like Blackwater to something bizarre like Xe said to me that there was history that needed to be escaped. With embarrassment stacking like cord wood in Usanistan, that story certainly suggests that those boys accidentally made themselves expendable.

I like the fact that airplanes are grounded across Europe. Hopefully one or two people will wake up to the fact that Mother Nature always has her way in the end and is far greater and more powerful then we earthlings - mere specks which are little more then volcanic ash in the wind.

Note reports of shortages in Britan due to the grounded airline industry. Those that have taken the warning to prepare a stash of necessities will get to test their arrangements. Do check your supply of medicines as apparently shortages are starting to develop.A one off event unlikely to ever happen again? Perhaps...

Holland, Belgium, Britain and Germany have extended their airspace closures another 24 hours, and though I haven't checked Paris, that should be the same.

And that's pending improvement in the situation, of which there seems to be little or no proof.The dust cloud moves slowly and the volcano is not only still active, but according to the latest reports, increasingly so.

And yes, that all means shortages of certain items are not far behind. A lot of fresh produce may be either not available or rise in price starting Monday.

Also. I was wondering about the prices for flowers from Holland in the rest of the world. What about tulip festivals?

Old news for the readers of TAE.A great presentation. Watch it or read the transcript.

http://www.pbs.org/moyers/journal/04162010/watch.html April 16, 2010

BILL MOYERS: The JOURNAL

Simon Johnson and James Kwak. They have written this new book, 13 BANKERS: THE WALL STREET TAKEOVER AND THE NEXT FINANCIAL MELTDOWN. It's a must read - already a best seller -- and it couldn't have come at a better time. This book could change the debate over financial reform by tipping it in favor of the public.

WaMu, as we were reminded this week, made sub-prime loans that its executives knew were rotten, then packaged them as mortgage securities, and pawned them off on unsuspecting investors.

And late this week the Securities and Exchange Commission charged the godfather of Wall Street, Goldman Sachs, with fraud in earning a fifteen million dollar fee involving those complex CDO's, a hedge fund, and the housing market. ---- jal

You know, if your mind bends in a mystical direction, you might find yourself wondering if the volcanic ash cloud isn't a message from doG. For those folks I can offer two slightly plausible theories for what it means.

A few days before the volcano blew, I linked to a song about dust and wind by a European singer that caused Ilargi some distress. Subsequently, I burned down the Music Hall and disappeared into the wilderness where I got lost. Maybe the ash cloud blanketing Europe is doG saying that wasn't cool. Fortunately (for me at least) a beautiful and amazing lady, who has commented here a few times, found me lying desiccating beside a path. She picked me up, dusted me off, gave me a new heart, rewired my brain and generally made a better man of me.

OR, maybe it is doG's way of saying to the UK, Netherlands and any other potentially trouble making parties that the Icelanders are his new chosen people.

Now I don't happen to think any of this is true, except for the part about the beautiful and amazing lady, which is absolutely true.

"...Your friend is thoroughly immersed in the faith and priesthood of modern economics. Of course he believes what he is told..."

I think that such statements do not make for productive dialog. The fact that my friend is (a) very bright, (b) very kind-hearted, and (c) very well educated should, in my opinion, compel us to wonder why----beyond your assumption that he is a neo-classical kool-aid drinker---he would subscribe to such views. I happen to think that Stoneleigh mounts the most articulate and holistic argument against my friend's musings, as her beliefs are 4-dimensional, incorporating both historicism and all manner of social theory (as well as economic analyses) in her rebuke of the poet-Keynesian view of things.

Stoneleigh said the same thing I said, just more politely. She agreed that your friend believes in the view you expressed. She then explained why she does not think that belief will actually work out. You accept her saying that your friend believes nonsense but you don't accept me baldly saying your friend believes nonsense.

Look, Dan, modern economics is akin to court astrology. That sounds rough but it's true. There's no scientific method in what they do, just examination of entrails looking for signs they want to see. Paul Krugman is the classic example of this and he even has the faux Nobel prize in economics to show for it.

I do suggest strong reading in archaeology and anthropology. Past civilizations all had their belief systems and none of those belief systems survived the collapse of those civilizations intact. Oh, bits and pieces survived but not the entire belief system precisely because when that society collapsed people realized that what they had been believing wasn't working.

Neo-classical economics will suffer that fate. I even had a brief dialog with Steven Keen elsewhere about these same ideas and he agrees.

The fact that I simply call a spade a spade rather than waddling around it in politically correct language doesn't change the fact that your friend is, indeed, a serious kool-aid drinker. Being "bright" doesn't have anything to do with that as plenty of other "bright" people have believed equally crazy ideas. How about Isaac Newton and astrology? That doesn't invalidate his other work but his utterances and writings about astrology are, shall we say, revealing about the persistence of folly in the human mind.

Given that your friend does not likely read TAE, I wasn't worried about offending him. What I was trying to do was make you think about the persistence of belief systems versus the physical reality around them, something at which I seem to have failed.

I understand your point. I have to tell you, however, that it reeks of intellectual holier-than-thou-ism:

RE: "...Look, Dan, modern economics is akin to court astrology. That sounds rough but it's true. There's no scientific method in what they do, just examination of entrails looking for signs they want to see. Paul Krugman is the classic example of this and he even has the faux Nobel prize in economics to show for it..."

You are, in my opinion, incorrect in this somewhat intellectually arrogant musing. Modern economists---neo-classical economists---believe that the floating dollar is a panacea to all fiscal ills, and that public debt can always be in some manner monetized away. This is not astrology. YES, I AGREE WITH THOSE WHO BELIEVE IT WILL FAIL, AND FAIL VOLCANICALLY. But to assert that these guys are all pseudo-scientists and shamans is, frankly, arrogant bologna.

I must admit, however, that I don't expect much more from COMMENTERS on sites like TAE. These places have fast become the domiciles of sycophants and apparently insecure souls who live for the virtual pats on the back they receive from folks who agree with their every utterance.

It is indeed the greatest irony that the COMMENT SECTIONS of wonderful blogs LIKE TAE often become self-reinforcing vomitoria for the intellectually and otherwise insecure.

Greyzone, you are so CERTAIN that Steve Keen (Whom I happen to agree with, by the way...but I also am willing to entertain the chance that he may be wrong on some scores as well) is right is his assessment of neo-classical thinking, that not only are you not willing to even enter into a thoughtful discussion about the rationale behind the neo-classical and post-Keynesian view, but your style---and others in these types of pseudo-communities---is to shoot first, and to hell with asking any questions.

I have great respect for Ilargi and Stoneleigh. Their efforts have saved thousands of individuals countless millions of dollars and dollar-equivalents. Their diligence has allowed people who might not other wise understand the precipice upon which we teeter to prepare for the worst.

But as for you and others like you---who not only refuse to entertain the outside chance that you may be wrong and someone else may be right, but who rely upon a sharp tongue whilst cowering behind the fact that we're not talking face-to-face---I have grown weary of the pomposity that trolls these halls.

I just erased your comment on the Kenyan flower industry, which hurts me all the more since I happen to know your grandson works in that industry, and I posted a comment earlier on Dutch flower exports.

The Icelandic meteorological people are saying the disruption to airtravel might last well into next week. If so, what are the odds for precipitating a european stock crash because of the logistical breakdown?

There's little chance of accurately gauging any local undimming effects from the lack of airline exhaust, since the cloud-related dimming should decrease temperatures simultaneously, but if large-scale grounding were to continue for several more days, there might still be a significant localised residual increase in temperature, especially where the cloud dimming doesnt overlap with reduced airlane activity, perhaps indicating whether the rough magnitude of exhaust dimming has terrifying climatological implications, or not so much.The cloud itself should marginally reduce global temperatures this year and next, but in my worser fears the lack of airline exhaust could conceivably increase temperatures by several degrees almost instantaneously across europe, though its probably a much smaller effect in reality.

Gylangirl,You made reference a couple of days ago (I’m a bit behind!) to Riane Eisler’s The Chalice and the Blade. I wanted to add my recommendation of the book, a book that changed forever how I look at HIStory. That, and couple of works of fiction - Alice Walker’s The Temple of My Familiar from about the same time and Anita Diamant’s The Red Tent published a few years later - tease out the stories of women’s stories that are often hidden in the tapestry of tellings by conquerors.

What I think many people - men and women - don’t understand about feminism is that it is not a system that privileges women; rather it is a system that asks us to value the generative and nourishing aspect of all of humanity (and, indeed, all creatures and creation).

I always meant to go back to The Chalice and the Blade. Your mention of it has inspired me to take it off the shelf.

There are two reasons why flying dwarfs any other environmental impact a single person can exert. The first is the distance it permits us to cover. According to the Royal Commission on Environmental Pollution, the carbon emissions per passenger mile "for a fully loaded cruising airliner are comparable to a passenger car carrying three or four people". In other words, they are about half those, per person, of a car containing the average loading of 1.56 people. But while the mean distance travelled by car in the UK is 9,200 miles per year, in a plane we can beat that in one day. On a return flight from London to New York, every passenger produces roughly 1.2 tonnes of carbon dioxide: the very quantity we will each be entitled to emit in a year once the necessary cut in emissions has been made.

The second reason is that the climate impact of aeroplanes is not confined to the carbon they produce. They release several different kinds of gases and particles. Some of them cool the planet, others warm it. In the upper tropo-sphere, where most large planes fly, hot, wet air from the jet engine exhaust mixes with cold air. As the moisture condenses, it can form "contrails", which in turn appear to give rise to cirrus clouds - those high wispy formations of ice crystals sometimes known as "horsetails". While they reflect some of the sun's heat back into the space, they also trap heat in the atmosphere, especially at night; the heat trapping seems to be the stronger effect. The overall impact, according to the Intergovernmental Panel on Climate Change, is a warming effect 2.7 times that of the carbon dioxide alone.

@Dan, I agree that one should keep an open mind and periodically reconsider alternate views and perspectives to avoid mental dogmatism. If I may qoute you here:

"the neo-Keynesians will simply inject monies where needed in order to minimize the social impact of the crisis."

I dont think they can inject it where really needed because they dont know where that is, and have lost (control of) the tools to do so, if they ever had them.

"..they believe that their monetary policies CAN stave off even the worst crisis. This belief, in itself---and in concert with the printing presses---has some power."

But this is exactly the point, Dan, its not monetary policy at all- the culmination of their belief-system now requires the systematic suspension of every mechanism of price discovery available in the housing markets, actions that are well outside of defined monetary policy, so continuously permitting and encouraging fraud by the systemic misrepresentation of values and degenerating the very legality of market policy so far that indefinitely sustained obfuscatory or unlawful activities are now completely necessary and obligatory to keep the thing from collapsing right here.

If their policy could only be implemented without the evident massive systemic fraud accompanying it, we might have a clearer idea of how its supposed to work. Or perhaps that is the only way it can work.I feel that if they need to violently deform markets to insert policy, and break or destroy essential laws of valuation in order to make their policies work, such submonetary governance becomes irredeemably corrupted and morally unworkable, even if it produces the desired stabilisation, which it very likely wont. Best wishes.

Agree with the sentiment about Dan's friend but lets suppose they TRY to monetize their way out of it?

My question has long been, "what is the pathway for all this money to get out of the banks into American pockets?"

It can't be through more debt, the banks wont lend and the borrowers can't borrow. It can't be through tax cuts, they go only to those who pay taxes and the quanta are too small, it can't go through pay rises for people out of work and it wont go to those with jobs because companies will just use the money to restore profitability before passing anything on to people whose incomes have fallen in real terms for 25 years.

They can't reflate the property market and even if they could, the money would still be trapped in the banks.

But if there is no way for the printed money to get into the real world economy and the hands of those who need to spend it, the chances of inflation are also dead.

So to paraphrase Dan's friend, the printing of money is a non-issue, but the deflation of the global economy will proceed anyway.

Nevertheless, I want to know HOW these clowns think they are going to get that money into the economy.

That's a helluva catch 22, bub.I like that summary: that real estate built the nation, and can take it down.The big question is the why of it -not the how, but more importantly, the specific greed (and stupidity) built into the game plan that left us so vulnerable. That's the weird thing...all the yap about how strong (militarily) and mighty (financially) and every other superlative riddling the rhetoric, employed ad nauseum throughout the media since Christ was a child - and yet, such a simple microcosm built into the philispophical fabric lays the foundation of failure.

I think too many were dedicated for far too long, to the idea that it took supreme upward mobility and riches to afford the life that the vast majority of Americans historically have aspired to - simply by working hard and maintaining a consistent attitude. Once that started wafting upward out of reach, rather than addressing that problem, the nation just invented new ways to skirt the issue...for awhile.

How is it that so many go cross-eyed at the idea that homes should be affordable based on the average incomes workers actually earn?It makes too much sense - but is opposed to the idea that a "home" becomes a lottery ticket to riches otherwise out of reach.When the chickens come home to roost and we examine these errors of our ways, it's a little late in the game to be blaming every single thing (be that partisan, or ideological) for such obvious mistakes made - there was always a general consensus of opinion that hay would be made while the sun shone.It appears that the true value of most anything has been skewed, chewed and barbequed...with a lot of nasty little consequences come to bite the butt off the body politic.Not since the natives sold Manhattan for a song, and walked away laughing at such a notion, have we seen just such a cosmic joke.This one may wind up causing us as much harm as that one caused them.